How Do DRIP Plans Work?

That's something a beginning investor will need to know in order to make the most of the money they invest.

When it comes to saving money, one thing is clear: the easier the process is, the more likely you are to stick with the plan. This is why DRIP plans are becoming so much more popular these days. Instead of requiring that you put more money into your stock account, you will use this dividend reinvestment plan to make the most of the money you've already invested.

How Dividend Reinvestment Helps You

A DRIP plan, or a stock dividend reinvestment plan , works in this way. When you have a set of stock shares, you earn dividends when the stock values go up. In most cases, you might have those dividend checks sent to you in order to put into a money market account or some other savings account. In a dividend reinvestment plan, you would not receive those checks. Those earnings instead would go directly to buying new stock shares, increasing the number of shares you own.

When you own more shares of a stock, you will then be able to make even more money from this account. For example, if you own $100 in stock shares, with 10 shares at $10, then you earn $1 on each share because the value goes up, the stock value is then $110. If you take that newly earned $10 and then reinvest it to buy new stocks, you will buy (about) one more stock share, bringing your stocks up to 11 instead of 10. This doesn't sound like a lot, but then you have an additional stock to earn dividends as well. Over time, you will be able to earn more money without adding in any additional savings from your checking account.

These DRIP plans are simple to setup and can be quickly forgotten until you see your earnings statement. While you will still have to pay taxes on the dividends you earn, you often do not have to pay any fees in order to reinvest, making this a cheaper and yet more profitable investing arrangement.

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