DRIP

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Dividend Reinvestment Plan

A practice or agreement in which dividends on a security are used to buy more of the same security rather than be disbursed to the investor in cash. A dividend reinvestment plan is relatively common in mutual funds; investors agree to use dividends and other capital gains to reinvest in more shares of the mutual fund. While this involves assuming more risk in the mutual fund, it carries the possibility of higher returns.

DRIP

Dividend reinvestment plan (DRIP).

Many publicly held companies allow shareholders to reinvest dividends in company stock or buy additional shares through dividend reinvestment plans, or DRIPs.

Enrolling in a DRIP enables you to build your investment gradually, taking advantage of dollar cost averaging and usually paying only a minimal transaction fee for each purchase.

Many DRIPs will also buy back shares at any time you want to sell, in most cases for a minimal sales charge.

One potential drawback of purchasing through a DRIP is that you accumulate shares at different prices over time, making it more difficult to determine your cost basis -- especially if you want to sell some of but not all your holdings.