Dividend reinvestment plans or DRIPs are very popular among investors, especially the small investors. Investing in these can be considered as a mutually beneficial strategy for both companies and investors. But they also have some pitfalls.

Advantages of DRIPs

  1. They have low minimum requirements and have easy to follow rules.
  2. Like dollar cost averaging, the strategy helps investors to grow their portfolio overtime by dripping money.
  3. DRIPs allow investors to reinvest their profit to make more profit; usually free of cost.
  4. Most companies offer discounts over market price for purchasing their stocks via DRIPs.
  5. They are very good long term investing plans which do not require much time or effort after enrolling a program.
  6. The company also benefits via many means, DRIPs provide a stable base of shareholders, stabilized share price as the percentage of DRIP shares increases, and reinvesting of dividend within the company.

Disadvantages of DRIPs

  1. Lack of diversification as investors are investing in only one company.
  2. Need good initial screening as investors need to invest in a company having very good long-term growth possibility and offering good dividend payments.
  3. They are not good plans for investors looking for profiting from fluctuations in share prices.
  4. They are not suitable for traders trading for their livelihood.

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