What You Need to Know About Compound Stock Shares

Quick Take

Learning the basics of compound stock shares will make you understand how the industry works. The guide will introduce you to some basics.

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Compound stock shares are often referred to as DRIP or Dividend Reinvestment Plan. It is essentially an equity investment offered directly by a company. Investors who invest in compound stock shares or through DRIP means that they do not receive any dividends in the form of cash. Instead, the reinvestment of the dividends is done in underlying equity.

Understanding Basic Terms

To help you further understand what compound stock shares are, you need to be able to understand the common terms used in the stock market.

The terms stock and share are often used interchangeably. Although there is no underlying difference between the two, there is a slight difference between the terms. Shares refer to the ownership certificates of any company while shares refer to the ownership certificates of a specific company. So, when you refer to stocks, you are referring to different shares in several companies and when you say shares you are referring to ownership in only one particular company.

Profits earned from any shares or stocks are paid in dividends . Dividends can be in the form of cash, property or stock. Stock certificates, on the other hand, are written proofs of ownership of shares. Nowadays, these certificates are often kept electronically by the brokerage.

Understanding Compounding

With compound stock shares, the investment return from any dividends can be immediately invested for the purpose of price and appreciation and compounding. Compounding is the term used when the interest is added to the principal so the added interest also earns interest.

In this form of stocks, investors often become registered shareholders as oppose to beneficial shareholders. Registered shareholders are in a way direct stock owners. Under DRIP, individual companies allow shareholders to buy stocks, at a minimal amount, directly from the company without a brokerage.

Stock Trading

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Most stocks are traded though exchanges which are venues where both the buyer and seller meet. This is also where they decide the price for each share available. Stock trading can be done in 2 ways, through a physical stock exchange platform and virtually or electronically.

A physical location, like the New York Stock Exchange , is an example of one way of stock trading. The other is through online stock market investing which is done virtually.

“Stock market day trading” is the trading of stock wherein the trader buys and sells stocks all throughout the day in the hope that the stocks will climb or fall in value for the time they own the stocks. This allows them to lock in quick profits. However, it is important to remember that day trading is extremely risky and can often result to big losses.

Advantages of Compound Stock Shares

There are certain advantages in investing in compound stock shares. One of the main benefits is that you are able to procure stocks at a much lower cost and be able to build a stock portfolio on your own. Another benefit is that some programs allow dividend reinvestments in partial shares.