by Altaf Sahibzada

Created on: June 26, 2008

Escape From Panic Selling Think of DRIPs

How to avoid panic selling and not to be sorry? Many a times investors keep their hands on sell button during periods of economic turmoil as was seen recently. These are short term fluctuations. But it is very painful to see the value of investments falling rapidly. At that time there is a great pressure on selling and many a times an investor ends up selling a stock only to find the prices back to normal after some time. However, the investor has lost by that time.

DRIP

Dividend Reinvestment Plan or DRIP can be an effective strategy to avoid any panic selling. With this, an investor has the option of receiving additional shares of a company and not dividends. Once one enrolls in this plan, any cash dividends paid by a company are used towards the purchase of more shares of the same stock or company.

This strategy is more useful for those investors who can live without dividends for a long time and would forgo any dividend payments for acquiring more shares. This is best applicable to the situation of a long term investor.

This produces a compounding effect. While investors get more shares, at the same time they also tend to increase the value of their holdings and portfolios.

The Logic Behind DRIPs

What is the rationale behind DRIPs? The rationale behind this is that investors weather out short but violent movements in the value of stocks. They are not bothered about short market movements.

Under this plan, it is not easy to sell shares. Though there is no bar in selling them, but it is complicated, time consuming and costly. Though this can be termed as a drawback, that is good as it helps in avoiding any impulse selling.

Types of DRIPs

There are two types of DRIPs. One is directly offered by the companies. The second type is directly offered in house by brokers. The former are better and more lucrative.

One major drawback with in house DRIPs is that these are available only in whole numbers. One cannot buy partial shares with these. On the other hand one can buy even partial shares under DRIPs offered by companies directly. For example, supposing one gets a dividend of $30 and the price of a share of that company is $20. While with an in house broker, one can buy only one share, leaving a balance of $10, with companies, one can buy one and a half shares.

Essentials of DRIPs

In order to enroll under this plan, one should first have the shares of a selected company. Only after that one can apply for enrolment.

So the first step under this is that one should find out the companies which offer DRIPs or the one in which one is particularly interested. Remember that all the companies do not have DRIPs. Then one should buy shares for that particular company in the open market.

Once bought, an investor needs to transfer these shares in his own name. For this one has to contact the registrars of that company and get the shares transferred. This involves payment of fees.

Once the shares have been transferred to a particular name, one can call upon the registrar and apply to be enrolled under DRIP of that company. Once enrolled, whatever dividend one receives monthly or quarterly, gets automatically spent on the purchase of shares of that company. These don't need to be transferred.

If you are truly disturbed from panic selling, then think of DRIPs.

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