A Guide to Dividends and Reinvestment
An important yet sometimes overlooked aspect of investing in the
stock market or other investment markets is the payment of
dividends by the investment. Many people who invest only
part-time or have investment plans through their workplace may
not even be aware that dividends exist; they may even be
confused by the sudden payment of dividends that appears
periodically.
For those individuals who aren't sure what dividends are or what
you should do with dividend payments, this guide is for you.
Below you'll find some basic information on what dividends are,
as well as ideas of when you should reinvest your dividends and
when you shouldn't.
Defining Dividends
At its most simple, a dividend is an additional amount that an
investor receives when the stocks or bonds that they are
invested in perform well enough so as to give a profit to the
company that they are issued from.
Many companies pay dividends based upon a portion of their
profits, which is that portion divided up among all of those who
have invested in it as a way to thank their investors for having
faith in them and to share their profits with those who help
them to stay in business.
Dividends are paid per share, so the more shares of a particular
stock that you have the more you'll receive when dividends are
paid usually quarterly, as that's when business report their
earnings and profits or losses.
Some dividends are also paid on certain bonds or other
investments that are done through a money market account; these
dividends are a form of interest for the investment. In most
cases, dividends are paid into a money market account so that
you can choose to reinvest or withdraw them per your prerogative.
Some investments automatically reinvest all dividends paid,
however, and many investment firms give you the option of having
all of your dividends reinvested automatically into the stock or
investment that paid them.
Reinvesting Dividends
Reinvesting dividends is an easy way to make more money off of a
particular stock or investment... after all, the investment is
doing well enough to be paying dividends, and the reinvestment
means that you have more of the stock or investment than you did
before.
If the dividends that you receive are paid to a money market
account, you may also choose to reinvest them into other stocks
or investments than the one that originally paid them... this
can be especially useful if you are receiving dividends from one
of your investments that you have a lot of shares in, but you
have another investment that you don't have much of.
You can use the dividend from the larger investment to slowly
build up the smaller one, or you can split the dividends among
several different investments so as to build them all up over
time.
When Not to Reinvest Dividends
Sometimes, however, it's just as wise to not reinvest your
dividends. This is especially true when you're holding a balance
in your money market account to take advantage of a high
interest rate that's being paid to it, or when you're receiving
dividends from short-term investments that you're going to cash
out soon anyway.
Even if you decide not to reinvest your dividends, they are
still an advantage of investing in certain companies or certain
types of investments.
Remember to check and see whether your investments pay dividends
and to investigate the options available to you in regards to
reinvesting or gaining interest off of any dividends that are
paid from your investments.
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