Candlestick Trading Blog

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Investors get burned due to the wild range of emotions involved in trading and investing. Through this type of stock investing, investors can buy shares on a dollar-cost averaging basis and they can establish portfolio diversification. You can decide how many dollars you intend to invest on an investment schedule that you set up in advance, and the dollar-cost averaging imposes discipline of your investing.

Advantages to dividend reinvestment include the following:

1)  Most companies will allow investors to purchase additional shares for very nominal fees or for no fee at all. Optional Cash Purchase Plans, and/or Stock Purchase Plans allow investors to send in as little as 10 dollars at a time when buying stock additionally.

2)  DRPs do not require a large sum of money to begin. Typically you must own at least one share in order to enroll.

3)  There are some companies that allow investors to purchase stock at a discount price to the current market price.

4)  Through dividend reinvestment, investors are forced to buy stock on a regular basis, thus forcing them to stay on an investment schedule. This schedule makes them invest small amounts of money on a regular basis that they normally would not invest.

One downside to using Dividend Reinvestment Plans is that the investor must keep track of cost basis for many small purchases of stock dividends, and also maintain a record of the purchases. This record keeping can be costly at times and very tedious. It must however, be done, in order for the investor to accurately calculate the capital gain tax when any shares are sold. This must be provided to the IRS if requested.

Dividend reinvestment is one of many investment options that works for the very patient, detail oriented, and organized investor. Some investors, however, find it burdensome due to the amount of paperwork and consistent tracking.  Be sure to do your research before embarking on this investing strategy.