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Dividend re-investment plan (DRP)

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A lot of people want to participate in the stock market, they just don't have the funds to do so or they are not prepared to enter the stock market world. Mutual fund investing has been popular for people that don't know what to do or how to manage it. A dividend re-investment plan (DRP) is another road you may consider if you want to purchase stocks but you don't have the money.

What is a DRP?
Several companies will offer DRPs to help their stockholders purchase stock from the company. The amounts can be as large or as small as you desire and can be purchased on a monthly basis. The money you make on the dividends will then be re-invested to purchase more stock. Hence where the name dividend re-investment plans comes from. So how does it work exactly? Basically you will purchase a share of stock and the company doesn't pay you any money. Instead they take all the money you earn and they re-invest it into more stocks. This is a great way to make some money in the stock market without using a broker.

Why should you consider a DRP?
There are several reasons why you should look into DRPs. One of the biggest reasons people use them is because they don't need to come up with a ton of money to invest. In order to participate in a DRP, you only need to own a single share. DRPs provide people with the opportunity to get some money and put it to good use by re-investing it or growth their wealth. You also have the option to pull out and walk away with spending money.

Depending upon the DRP plan and the company you are dealing with, you can re-invest this money for free or for a small fee. You also have the ability to purchase company stock at a discounted rate. This is a huge advantage for new investors that are trying to grow their portfolio. When you use a DRP, you are teaching yourself how to be patient and have delayed gratification. This is because you purchase a stock and then you must retain this stock for a certain amount of time. When the time comes to re-invest or cash out, you may have a long-term outlook instead and you can see the bigger picture instead of instant gratification.

Several companies will help you pay for the DRP by establishing direct debit from your bank account. This way you don't really see the money before it is transferred and this makes it easier to continue investing.

Different types of DRPs
Before you consider any investment strategy, you need to know what you are getting into. Every investment includes some type of risk so it is better to know the facts about DRPs before you blindly invest in them. There are 3 basic types of DRPs, company-run, transfer agent-run, and brokerage-run. DRPs are often run by the companies. This is a great way for them to bypass brokers and all their fees and still allow people to purchase shares in their company. With a company-run DRP, the information is collected and run from the headquarters of that company. This may be a hassle for you if you live away from headquarters and you are trying to withdraw funds.

Transfer agent-run DRPs are often difficult to manage. The companies have sent their information to a third-party to run, so you have another hoop to jump through. The transfer agent can provide you with great information, but it can be difficult to obtain this information to begin with.

The final type of DRP is a brokerage-run DRP. This is where the shareholders are able to reinvest their money for free. The money you re-invest applies only to your dividend amount, not your cash purchases.


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