Canadian Securities Course (CSC) Level 1 Practice Exam

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How does a dividend reinvestment plan work?

It involves reinvesting dividends into different stocks
It involves reinvesting dividends into fixed deposits
It involves automatically reinvesting dividends into additional shares
It involves receiving cash payments for dividends

The correct answer is: It involves automatically reinvesting dividends into additional shares

A dividend reinvestment plan (DRIP) works by automatically reinvesting dividends that are paid out by a company back into additional shares of that same company's stock. This means that instead of receiving cash payments for the dividends, shareholders who participate in a DRIP will see their dividend payments used to purchase more shares of the same stock, thereby increasing their ownership stake in the company over time. This process can help investors grow their investment holdings without incurring additional transaction costs.