Dividend reinvestment is the process of reinvestment of various amounts by shareholders in companies over the course of an investment made for the long term. This form of investment helps the shareholders to purchase the shares of large corporate houses at a much lower price.
Dividend reinvestment is done through participating in dividend reinvestment plans (DRIP) of companies. The companies in this case do not give dividend returns to their investors on a quarterly basis. Rather, they buy additional shares of the company with the investor�s money in his name.
The companies that offer opportunities of reinvestment of dividend through their own DRIP stipulate the different times of the year in which the shareholders can carry out dividend reinvestments. It must however be remembered that the sold shares are taken out from the share reserve of the company.
The company does not directly trade shares in the secondary market. The dividend reinvestment shares are not directly salable in the market. The investor must sell these shares back to the issuing company at the current market price.
The companies earn profit through dividend reinvestment facilities because these offer them the opportunity to get access to capital at a low cost. The shares issued under dividend reinvestment plans are brought from the company directly and are then reinvested in the same company itself. This form of investment is encouraged by companies because they can benefit from long-term associations with their investors. Moreover, these shares have a lower liquidity than other shares and hence cannot be sold easily.
The investors also stand to benefit from dividend reinvestments. This form of investment does not require the presence of a broker and the investor can save a lot of money in the process. The companies do not demand any commission fees either. Moreover, the flexibility that this form of investment offers is a huge advantage. Investors opting for a DRIP can invest any amount of money according to their financial position. Sometimes, there is also the option of directly buying additional shares from the company and what is more, a discount ranging from 1% to 10% can be obtained in the process. The stocks may also be received at a discounted price, the discount being given on market spot price.