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A Guide to Dividends and Reinvestment
An important yet sometimes overlooked aspect of investing in the stock market or other investment markets is the payment of dividends by the investment. Many people who invest only part-time or have investment plans through their workplace may not even be aware that dividends exist; they may even be confused by the sudden payment of dividends that appears periodically.
For those individuals who arent sure what dividends are or what you should do with dividend payments, this guide is for you.
Below youll find some basic information on what dividends are, as well as ideas of when you should reinvest your dividends and when you shouldnt.
Defining Dividends
At its most simple, a dividend is an additional amount that an investor receives when the stocks or bonds that they are invested in perform well enough so as to give a profit to the company that they are issued from.
Many companies pay dividends based upon a portion of their profits, which is that portion divided up among all of those who have invested in it as a way to thank their investors for having faith in them and to share their profits with those who help them to stay in business.
Dividends are paid per share, so the more shares of a particular stock that you have the more youll receive when dividends are paid usually quarterly, as thats when business report their earnings and profits or losses.
Some dividends are also paid on certain bonds or other investments that are done through a money market account; these dividends are a form of interest for the investment. In most cases, dividends are paid into a money market account so that you can choose to reinvest or withdraw them per your prerogative.
Some investments automatically reinvest all dividends paid, however, and many investment firms give you the option of having all of your dividends reinvested automatically into the stock or investment that paid them.
Reinvesting Dividends
Reinvesting dividends is an easy way to make more money off of a particular stock or investment after all, the investment is doing well enough to be paying dividends, and the reinvestment means that you have more of the stock or investment than you did before.
If the dividends that you receive are paid to a money market account, you may also choose to reinvest them into other stocks or investments than the one that originally paid them this can be especially useful if you are receiving dividends from one of your investments that you have a lot of shares in, but you have another investment that you dont have much of.
You can use the dividend from the larger investment to slowly build up the smaller one, or you can split the dividends among several different investments so as to build them all up over time.
When Not to Reinvest Dividends
Sometimes, however, its just as wise to not reinvest your dividends. This is especially true when youre holding a balance in your money market account to take advantage of a high interest rate thats being paid to it, or when youre receiving dividends from short-term investments that youre going to cash out soon anyway.
Even if you decide not to reinvest your dividends, they are still an advantage of investing in certain companies or certain types of investments.
Remember to check and see whether your investments pay dividends and to investigate the options available to you in regards to reinvesting or gaining interest off of any dividends that are paid from your investments.
You may freely reprint this article provided the following authors biography (including the live URL link) remains intact:
About The Author
John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the website.
Selling Puts
Im new to the sell the put strategy and theres something I dont understand: If ABC is falling and you dont wish to own the stock, you can come up with some more money and buy yourself out of the puts you sold and be done with it for a small loss.
Can you give an example of this
Here goes:
When you sell a put, you are giving the market the right to put the underlying stock to you at a specified price. So, say ABC is trading at $70 and looking strong. The stock seems like its going to continue higher. The 65 puts were a buck fifty, and you sold 10 contracts of them. So, you took in $1500. Now what you have done is given the market the right to force you under contract to buy ABC at 65 bucks, even if it falls to 60.
Granted you sold those puts because you believe that ABC is going to either continue higher or at least stay where its at. If it does that, you take in the $1500, the options expire, and you made money. But what if it doest rise. The SEC says there is fraud, whatever. The bottom line is that it is falling instead of going up. Now, if it stays above 65, you have no worries. But what if it looks like it might fail 65 dollars Well youve entered into a contract saying youll buy it at 65. If you do nothing, that stock will be put to you.
So, the way to get around buying 1000 shares of ABC, is to buy back the puts you sold. When you buy back your sold puts or calls, the contract is cancelled out. The play is over. So whats the catch The catch is that you sold the puts for a buck and a half, but now they are say $7. So, you have to make a decision. Would you rather pay $7000 and get out of this trade, or do you want to buy 1000 shares of ABC at 65
Some will be happy taking the stock. Thats why its a pretty good way to get stock a bit cheaper if you really want them. If a stock is $70.50 and you sell the 70 put and take in $2, if it falls to 69.90 and gets put to you, great! You wanted it anyway, and you got paid to take it. If however you were selling the puts as a profit play, then of course you have to manage that position.
Just like using stops on a stock play, you never want your options play to get away from you. If you took in say $1.50 on selling the puts, maybe you decide that if they rise in value to $3 you will buy them back. Everyone has their own strategy for this, but you do need to go into a put sale with an idea of what sort of risk you are going to allow yourself.
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