Reinvesting Dividends When Stock Trading

reinvesting dividendsMany have the question when going to purchase a stock or mutual fund, "What does the dividend reinvest option mean, and should I do it?"

First of all, for those that are not aware of it, there is usually a dividend reinvest option that your trading account offers you when taking a new position. If it is not there visibly, call your brokerage company.

For my platform, I am given the option to check the dividend reinvest box right before confirming my trade.

To start it off, dividends are cash distributions given by companies to their shareholders following a profitable time period. For the most part, companies have two options when dealing with profits.

First, companies can choose to retain earnings in the company, making the company ultimately worth more (higher asset value), thus hoping to increase the stock price. Apple is a prime example of this. Rarely will you receive a dividend from Apple, however, owners have enjoyed a rather steady increase in their stock price.

The other option companies have is to share a portion of their profits with their shareholders. Sure, for the most part, this is not anything significant due to the amount of shareholders, but you might be surprised at how big dividends can be. Because of the cash distribution, stock volatility is usually much lower. Verizon is a good example of this, as they have really low volatility with a rather strong dividend for investors.

Neither approach is ultimately better than the other. It all depends on the individual company and how they choose to handle it. From an investment standpoint, the two different scenarios can be more intriguing, depending on your investment goals. For instance, I prefer to load up on high yielding dividend stocks for my retirement accounts, because over time, the dividends can pay off, despite the stock price moving with lower volatility.

In addition, I always choose to reinvest my dividends. By doing this, I then utilize the principle of compound interest. When reinvesting your dividends, you opt out of taking the cash and purchase more shares with it instead. Thus, after time, you can end up with double or triple the shares you started with, while continuing to earn dividends from the increased shareholding. Hopefully, if the company remains strong, your position will be great increased over time.

Dividends are an important trading principle to consider when taking a position. For some portfolios, it will not make sense to buy dividend yielding stocks, for others it definitely will. Happy Trading.

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Welcome Back Foreclosures

bank owned homesOnce again, I apologize for my limited updates to the site, as times continue to be busy. As we can see, there has definitely been upward movements in stock prices. In fact, with my last post, the Dow was lingering around the 10000 mark at which I said that I expected a "rubber bottom" at around that point and expected to see a rather steep jump from there. As of now, we can clearly see that has been the case. Now the question is how much is left as we begin to head near the always interesting "end of year" times.

One luxury that the housing market has enjoyed throughout most of the summer months was the lack of foreclosing from banks. Hundreds of thousands of potential foreclosed homes have been delayed due to a variety of reasons. Now, we are starting to see the banks move forward more aggressively. In fact, Bank of America announced today that it plans to resume paperwork for over 100,000 cases of foreclosures in 23 different states. Not only will the housing market now have to endure the off season, they will also have to do it while competing with a fresh load of foreclosed homes. Let the auctions begin!

The housing market will not be the only sector to get affected by the change. For several months now, hundreds of thousands (if not millions) have enjoyed the extra disposable income that has been generated from not having to pay their mortgage. This can be quite significant. As banks begin to foreclose more aggressively, this means that more and more people will be forced to pay occupancy costs again (duh!), which in turn will affect several other sectors. We have seen in recent studies that much of the recent economic activity is a result from government stimulus. If these go away, market growth goes away with it. So now the decision is, when do we make the decision to pay the bill of this party we have been enjoying for the last year and a half.

As of now, I believe we are nearing a rather aggressive pullback. November is known for the massive hedge fund redemptions that take place before year end as well as other year end pressures begin to pile up. Shorts should perform well during the end of October/beginning of November. Happy Trading.

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