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Use of investment income to buy additional securities. Many mutual fund companies and investment services offer the automatic reinvestment of dividends and capital gains distributions as an option investors.


The act or practice of taking profits or other proceeds from investments and making other investments with them. It nearly always means that one is investing in more of the same security. For example, one may take dividends from a stock and buy more shares with it or may take coupon payments to buy more of the same bond issue. Reinvestment often increases the value of a security.


When you own certain stocks and most mutual funds, you can reinvest the dividends or distributions to buy more shares instead of receiving a cash payout.

In a corporate Dividend Reinvestment Plan (DRIP), for example, a company offers you the right to reinvest any cash dividends automatically to buy more stock. When you open a mutual fund account, you're generally offered an automatic reinvestment option as well.

One benefit of reinvestment programs is that in most cases you can make the new investments without incurring the usual sales charges, so it can be a lower cost way to build your investment portfolio.

One potential drawback, if you're reinvesting in a taxable account, is that you acquire shares at different prices, so figuring the cost basis for capital gains or losses when you sell can be more complicated than if you made fewer, larger purchases. It's also true that you owe income or capital gains tax in the year the money is reinvested, which isn't the case in a tax-deferred or tax-free account.

You will also want to consider the impact of reinvestment on the diversification of your portfolio, since buying additional shares increases the percentage of your portfolio that is allocated to a particular stock or mutual fund.

References in periodicals archive ?
Executive Management Board, was reinvested in additional shares.
The cost savings that result from greater efficiencies can be reinvested in the relationship -- for example, toward activities such as trade spending for consumer-oriented promotions.
However, the taxpayer must be able to prove it reinvested the proceeds in qualified replacement property if the IRS raises the question.
1034 had not been repealed and J and C properly reinvested, they would have escaped gain recognition on the sale entirely.
A word of caution: Return on any broad market index selected must be calculated on a dividend reinvested basis.
4) Total Return at Net Asset Value is the combination of changes in the Common Share net asset value, reinvested dividend income and reinvested capital gains distributions at net asset value, if any, and does not reflect the sales charge, if applicable.
If you reinvested your dividends, that becomes part of your cost basis.
If you exercised the options, paid the income tax, and passed the reinvested proceeds on to your heirs 20 years after exercise, you would leave them $197,000 after estate taxes.
The problem of tax consequences arises when proceeds are reinvested at the individual level.
The result is that the principal will be returned on the maturity date as expected, but the additional income derived from reinvested cash flows will be substantially less than had been anticipated at the time the bond was purchased.
Dividends reinvested in newly issued or treasury shares of common stock of the Company under a dividend reinvestment plan will not be treated as dividends for the purpose of the pre-dividend free cash flow test and will not reduce excess cash for the purposes of the senior credit facility.