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Simple English definitions for legal terms
dividend-reinvestment plan
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A quick definition of dividend-reinvestment plan:
A dividend-reinvestment plan is a program that allows investors to use their dividends to purchase more shares of a company's stock. This can be done without any sales charge and sometimes at a discount from the stock's market price. The investor never receives the cash, but it is still treated as income. Some plans also allow for optional cash purchases of additional stock. There are three types of plans: brokerage-run, company-run, and transfer-agent-run. Brokerage-run plans are managed by a brokerage and are usually limited to dividend reinvestment. Company-run plans are operated by a corporation for its own shareholders and may offer additional features such as IRAs. Transfer-agent-run plans are administered by a financial institution for several companies, and investors can participate in multiple plans simultaneously.
A more thorough explanation:
A dividend-reinvestment plan is a program that allows investors to reinvest their dividends and additional voluntary payments into shares of a company's common stock. This is usually done without any sales charge and sometimes at a discount from the stock's market price. Although the investor never receives the cash, it is still treated as income to the investor. An investor may also be allowed to make optional cash purchases of additional stock.
- Brokerage-run dividend-reinvestment plan: A formal or informal program managed by a brokerage and allowing shareholders to reinvest dividends in a portfolio, often at no cost.
- Company-run dividend-reinvestment plan: A program operated by a corporation for its own shareholders. Company-run plans may offer additional features such as IRAs.
- Transfer-agent-run dividend-reinvestment plan: A program administered by a financial institution for several companies. An investor can participate in more than one DRIP program simultaneously and also make additional cash investments in multiple companies.
For example, if an investor owns 100 shares of a company's stock and the company pays a dividend of $1 per share, the investor would receive $100 in cash. However, if the investor participates in a dividend-reinvestment plan, the $100 would be used to purchase additional shares of the company's stock. This can help the investor increase their ownership in the company over time without having to pay additional fees.