What you should know about using automatic reinvestment plans
For some investments, it makes a lot of sense to use an automatic reinvestment plan. This sort of plan automatically invests any capital gains from your initial investment. This can only work in investments where the capital gains are distributed to the investor as cash. With an automatic reinvestment plan, you the investor will not see the cash. If an investor is invested in mutual funds, the dividends from those funds will automatically be used to purchase more shares of those funds. By using automatic reinvestment, the investor can take advantage of compounding interest. Also, the better the stocks do, the more of that stock the investor will eventually own. This is a good investment strategy.
One of the main advantages to using automatic reinvestment plans is that you can start with a small amount of money. It is often the case that you need to have money to make money. By investing in stocks or mutual funds and then having the profits reinvested, it is a good way to make money if you have no money or very little money. All you need to do is buy one share of a stock. Then, if you enroll in the automatic reinvestment plan, as soon as you have made enough money to buy a second share, you will automatically purchase it. You will never miss the money that was reinvested since it was never yours to begin with. In gambling terms, automatic reinvestment is called "playing with the house's money".
|
|
One thing to think about if you are considering using automatic reinvestment is whether you want to reinvest all of your capital gains or only a proportion. In the long run, your account will be worth the most if you reinvest all of you profits. However, we live in the now, not in the future and sometimes it is important to have cash flow for everyday expenses. Talk with your broker and find out if there are partial reinvestment options associated with the investment that you are making. You may be able to enjoy the best of both worlds by both receiving dividend checks and automatically reinvesting profits back into the profitable stocks.
Another thing to know when using automatic reinvestment plans is that the different automatic reinvestment plans have different costs associated with them. When you are initially purchasing stocks, you will often have to pay a brokerage commission on the stocks. By using an automatic reinvestment plan, some companies allow you to skip those brokerage commissions and fees entirely. This is one way in the investment business of getting a free lunch. Other companies will require you to pay a service charge, usually in the neighborhood of $30 per year. If you are looking for a mutual fund that offers automatic reinvestment, check into the reinvestment cost. Some programs that look free aren't because the commission is paid out of your dividend and your receive less stock.
Often, automatic reinvestment plans include an option for purchasing additional shares of the stock at a discount. The discount on the optional purchases should be outlined in a prospectus that will describe all the terms of the reinvestment plan. Carefully go over the prospectus to find out everything about the taxes related to your investment, the optional purchasing discounts, and the commission associated with reinvestment. If you do not understand anything in the prospectus, take it to your financial advisor. Anytime you are investing any amount of money you should be as informed as possible about the investment. When you are considering stock with automatic reinvestment, you are probably considering a long-term investment. Little things can add up over the long run so be sure to get professional advice when making these decisions.
