Automatic Reinvestment Plan

  

Categories: Investing, Stocks, Trading

Your mutual fund or other investment vehicle pays a dividend on the regular. What do you do with it?

Well, you could receive it in cash and go out there and spend it like a don. Or, you could set up automatic reinvestment, which just buys more shares of the mutual fund with the dividend proceeds you'd be distributed.

The bad news: You'll be taxed on those dividend distributions at the end of the year and have to pay cash taxes on them. The good news: The investment will compound at a much higher rate with those divvys reinvested. And in most fund complexes, there is no commission on those incremental purchases. Woot. ish.

Related or Semi-related Video

Finance: What is a Pension?31 Views

00:00

finance a la shmoop. what is a pension? well it rhymes with tension, and likely

00:08

for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]

00:12

another state employees pension that's backed up by a state that's going

00:16

bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people

00:21

well a pension is another term for a retirement fund. but what's special about

00:26

a pension is that the employer essentially forces you to put away money

00:31

for your retirement and then they invested for you.

00:35

how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]

00:39

employed ditch-digger might get a contribution of say 10 grand a year into

00:42

her pension, and that's each year 10 grand of forced savings for as long as

00:47

she you know digs ditches for the state. and in some states where the unions are

00:51

strong in the governing financial knowledge is weak the government

00:55

guarantees a minimum financial return on the pension investment made on behalf of

01:00

the employees. that is in California for example the state guarantees a 10% per

01:06

year return on their invested pension savings. if the invested return like [equation]

01:11

investing it in Wall Street and stocks and bonds and private equity funds and

01:15

all that stuff well if that invested return is less than that number less

01:19

than that 10%, then the state rights to the pinch and a check to cover the

01:23

incremental difference. yeah it's a huge Delta and it's well pretty much why you

01:28

a Californian Illinois you're going bankrupt remember. Jesus Saves

01:31

but Moses invests. [ Moses, holding stone tablets glares and demands interest]

01:35

Up Next

Finance: What is a Keogh Plan?
64 Views

A Keogh Plan is an IRA for self-employed people. Oh. Did we just spoil this video? You should still watch it...we put a lot of work into it...

Finance: What is Automatic Reinvestment?
3 Views

What is Automatic Reinvestment? Automatic reinvestment means that all of the money that investors make, “capital gains,” is reinvested into the...

Finance: What is a 401(k)?
51 Views

What is a 401(k)? A 401(k) is a retirement plan that is offered by many employers (government entities, however, use a 403(b) plan). These plans us...

Find other enlightening terms in Shmoop Finance Genius Bar(f)