A dividend reinvestment plan, or DRIP, is a plan offered by a dividend stock-bearing company that permits investors to reinvest cash dividends. The money is used to purchase either full or fractional shares of stock on the dividend payment date. DRIPs are great ways to increase the value of the investment.
In most DRIPs, investors can purchase the additional shares without having to pay a commission. In addition, the stock is often offered at a discount of the current price of the shares. Investors do not need a large sum of money to participate in a DRIP. Many companies permit investments as low as ten dollars and the money can be used to purchase fractional shares.
When the company operates the DRIP, the shares are taken from the organization’s share reserve. These DRIP shares are not permitted to be sold on the market so when the investor is ready to sell them, the stock must be sold back to the company. The selling price is usually the current market price for the shares. If a brokerage firm operates the DRIP, the shares are purchased and sold on the secondary market.
The dollar-cost averaging technique is used by DRIPs, which averages out the price at which investors purchase stock as the price moves up or down over the long-term. Under this system, investors never purchase the shares at their peak or their low. In the end, this is better for investors and allows them to build wealth more efficiently.
Not all companies offer DRIPS, though there are over 1,000 that do, so investors need to do some research to find those. Individuals should also learn about the account terms and who runs the plan. Once the desired DRIP is found, the individual should purchase shares in the company and establish a DRIP account.
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