Which term describes the act of reinvesting dividends to buy additional shares?

• A. Dividend reinvestment plan.
• B. Premium.
• C. Deductible.
• D. Grace period.

Answer: (A)

Dividends can be reinvested to buy more shares through a dividend reinvestment plan. In a DRIP, the cash dividends you receive are automatically used to purchase additional shares of the same stock (often including fractional shares), sometimes without commissions. This automatic reinvestment compounds your returns over time because you own more shares that will pay dividends in the future, creating a steady growth path with little ongoing effort. The other terms refer to different ideas—premium is an amount paid above value, deductible is a cost you can subtract for tax purposes, and grace period is a time to pay before penalties—so they do not describe the act of reinvesting dividends into shares.