What effect does a company's dividend reinvestment plan have on its stock price?

A:

When a dividend is received, an investor has two options: to keep the proceeds in a bank account or reinvest them. For the latter option, an investor can use a dividend reinvestment plan (DRIP).

DRIPS are provided by both companies themselves and brokerage accounts. There are a few differences between both types of plans. Company-operated DRIPS often place restrictions on when investors can purchase shares, while a brokerage-run account allows purchases at any time. The reason for this difference arises from how the stocks are purchased.

With a company-operated DRIP, the shares are issued from the company's own reserve of shares. When investors want to sell any shares purchased through a DRIP, they can only sell them back to the company. For this reason, a DRIP that is operated by the company itself does not affect the stock price of the shares in the market.

Conversely, a DRIP operated by a brokerage account purchases its shares directly through the secondary market. Because these shares are both bought and sold at market prices, a brokerage-operated DRIP will have the same effect on stock prices as a normal buy or sell transaction in the open market.

To learn more, see The Perks Of Dividend Reinvestment Plans, How And Why Do Companies Pay Dividends? and The Importance Of Dividends.

RELATED FAQS

  1. What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical ...
  2. How are Bollinger Bands® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets ...
  3. Why is it important to understand the Circular Flow Of Income when making investment ...

    Find out why investors should pay attention to a firm's circular flow of income model to measure its efficiency and evaluate ...
  4. What's the safest way to invest in high-yielding dividend stocks?

    Learn about some of the most important safety factors that you need to consider before you invest in high-yielding dividend ...
RELATED TERMS
  1. Accelerated Dividend

    Special dividends paid by a company ahead of an imminent change ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  4. Short Put

    A type of strategy regarding a put option, which is a contract ...
  5. Wingspread

    To maximize potential returns for certain levels of risk (while ...
  6. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...

You May Also Like

Related Articles
  1. When most investors begin planning for a steady income stream in retirement, they tend to gravitate towards fixed-income as a predominant asset class.
    Mutual Funds & ETFs

    Funds That Should Be On Every Investor’s ...

  2. Though dividends are thought to realm of conservative investors, they deserve a place in all portfolios. Here are some of the best bets.
    Trading Strategies

    The Best Bets In Dividend Stocks

  3. Lifestyle inflation occurs when 'you earn more, you spend more', and your spending ends up matching your earnings. Thus, no savings remain.
    Budgeting

    Failing To Build Wealth Despite Making ...

  4. Options & Futures

    Stock Futures vs Stock Options

  5. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

Trading Center