-1

Is it correct that stocks and mutual funds can distribute dividends and capital gains automatically without account holders' intervention, and then reinvest the distributed to buy new shares?

From http://www.investopedia.com/terms/r/reinvestment.asp#ixzz4VwAFynzX

What is 'Reinvestment'

Reinvestment is using dividends, interest and capital gains earned in an investment or mutual fund to purchase additional shares or units, rather than receiving the distributions in cash.

  1. In terms of stocks, it is the reinvestment of dividends to purchase additional shares.

  2. In terms of mutual funds, it is the reinvestment of distributions and dividends to purchase additional units of that fund.

  3. In terms of tax gain/loss harvesting, it is the realization of losses to offset a capital gains liability.

When it says "an investment or mutual fund", is a mutual fund not an investment? If no, what is the definition of an investment?

When it says "In terms of stocks", why does it only mention distribution of dividends but not distribution of capital gains?

When it says "In terms of mutual funds", it says about "the reinvestment of distributions and dividends". Does "distributions" not include distributions of "dividends"? why does it mention "distributions" parallel to "dividends"?

Does reinvestment only apply to interest or dividends, but not to capital gain?

How

  • 1
    Yes, a mutual fund can automatically reinvest dividends and/or capital gains in more shares of the mutual fund, but this is something that you must tell them that you want to do (usually done when you open an account). Generally, it is also possible to choose different options for dividends, short-term gains and long-term gains. Some mutual funds might have the default option be "reinvest all distributions" for those shareholders who do not make a choice; others might have "send me a check" as the default option. – Dilip Sarwate Jan 16 '17 at 15:33
  • 7
    @Tim - you are asking us to critique someone else's writing. Investopedia is no more an authority than SE, or the blogs of the members here. I've found multiple incorrect examples of Roth conversion math, for example, and the author insisted he was correct. That aside, you are asking us to address a half dozen questions here. Do you actually have a question or are you critiquing Investopedia articles (same as I do, but in private)? – JoeTaxpayer Jan 16 '17 at 16:03
5

1) When it says "an investment or mutual fund", is a mutual fund not an investment? If no, what is the definition of an investment?

A mutual fund is indeed an investment. The article probably mentions mutual funds separately from other investments because it is not uncommon for mutual funds to give you the option to automatically reinvest dividends and capital gains.

2) When it says "In terms of stocks", why does it only mention distribution of dividends but not distribution of capital gains?

Since distributions are received as cash deposits they can be used to buy more of the stock. Capital gains, on the other hand, occur when an asset increases in value. These gains are realized when the asset is sold. In the case of stocks, reinvestment of capital gains doesn't make much sense since buying more stock after selling it to realize capital gains results in you owning as much stock as you had before you realized the gains.

3) When it says "In terms of mutual funds", it says about "the reinvestment of distributions and dividends". Does "distributions" not include distributions of "dividends"? why does it mention "distributions" parallel to "dividends"?

Used in this setting, dividend and distribution are synonymous, which is highlighted by the way they are used in parallel.

4) Does reinvestment only apply to interest or dividends, but not to capital gain?

Reinvestment only applies to dividends in the case of stocks. Mutual funds must distribute capital gains to shareholders, making these distributions essentially cash dividends, usually as a special end of year distribution. If you've requested automatic reinvestment, the fund will buy more shares with these capital gain distributions as well.

  • FWIW, the stocks case becomes a bit more like the funds case when you consider ETFs, which trade like stocks do but have a variety distributions types like funds do. – Chris W. Rea Jan 16 '17 at 17:55

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.