What Is Reinvestment?
Using investment income — dividends, interest, or capital gains — to buy more shares instead of cashing out.
The Full Definition
Reinvestment means automatically using the income an investment generates — dividends, bond interest, or capital gains distributions — to purchase additional shares rather than withdrawing the cash. Most brokerages offer a Dividend Reinvestment Plan (DRIP) that does this automatically and commission-free. Reinvestment is the engine behind compound interest: each reinvested dividend buys more shares, which then generate their own dividends, creating a snowball effect that accelerates the longer it runs.
Real-World Example
An investor holding $50,000 in a dividend-paying index fund with a 1.5% yield earns $750 in dividends the first year. Reinvested, that $750 buys more shares, which themselves generate dividends the following year. Over 30 years, reinvesting dividends rather than spending them has historically roughly doubled total returns versus collecting the cash.