What Is a Compound Share of Stock?
A compound share of stock is a vague and misleading term for shares purchased through dividend reinvestment programs (also called DRIPS). Some ads for DRIPs will entice with fantastic stories of "one share millionaires" who started with one share and reaped huge returns. In real life, DRIPs grow your investments in much more mundane ways.
Other People Are Reading
-
DRIPs
-
Many publicly-traded companies offer DRIPs. You can call or visit a company's investor relations web page to see if a given company offers the program. To start a DRIP account, you buy a share or minimum purchase and set up a minimum monthly purchase. A monthly amount will be debited from your bank account and used to buy more shares, and all of the dividends you would normally receive as a check will be reinvested into new shares.
Advantages
-
DRIPs allow individuals to slowly grow their share base and investment over years without a large initial investment. DRIPs also bypass brokers by allowing individuals to buy directly from the company.
-
Compound Shares
-
Compound shares are a confusing misnomer. The term comes from the idea that your investment and dividends are compounded by reinvesting. However, the shares in a DRIP account are no different than other shares in a given company; the difference lies in the type of account that they are in. Furthermore, your deposits and dividends are used to purchase new shares, not magically used to grow existing shares.
Advertisements
-
Ads selling DRIPs have fantastical copy that offers to let you in on an investing secret or make you a millionaire with a tiny and inexpensive investment. While DRIPs can generate large profits from incremental investments over a long period of time, DRIPs are not secret and not get-rich-quick investments.
-
