Accumulating ordinary shares

3 key takeaways

• Accumulating ordinary shares reinvest dividends instead of paying them out.
• They are beneficial for investors seeking long-term growth.
• The value of these shares increases as dividends accumulate.

What are accumulating ordinary shares?

Accumulating ordinary shares, also known as accumulation shares, are a type of stock that does not distribute dividends to shareholders in cash. Instead, the dividends earned are reinvested back into the company. This reinvestment increases the value of each share, providing shareholders with capital growth rather than income. Accumulating shares are often favored by investors who are focused on long-term growth rather than immediate income.

Importance of accumulating ordinary shares

Accumulating ordinary shares are important for investors seeking to grow their investment over time. By reinvesting dividends, these shares allow investors to benefit from compounding growth, which can lead to significant value increases over the long term. This makes them an attractive option for individuals who do not need regular income from their investments and prefer to maximize their capital appreciation.

How accumulating ordinary shares work

1. Dividend generation: The company generates profits and declares dividends.
2. Reinvestment: Instead of paying out the dividends to shareholders, the company reinvests the profits back into the business or uses them to buy more shares.
3. Share value increase: The reinvested dividends increase the overall value of the company, which in turn increases the value of each share.
4. Long-term growth: Shareholders benefit from the compounded growth of their investment as the value of their shares appreciates over time.

Examples of accumulating ordinary shares

• Mutual funds: Some mutual funds offer accumulation share classes where dividends are automatically reinvested to purchase more shares, enhancing the value of the investment.
• Investment trusts: Certain investment trusts issue accumulation shares that reinvest income to boost the net asset value of the shares, aiming for capital growth.
• Company stocks: Some companies may offer accumulating ordinary shares as part of their equity structure, appealing to investors looking for long-term appreciation.

Real-world application

Consider an investor who purchases accumulating ordinary shares of a mutual fund. Instead of receiving quarterly dividend payments, the dividends are reinvested into the fund, purchasing additional shares. Over time, the value of the investor’s holding increases as more shares are acquired through reinvested dividends. This compounding effect can lead to substantial growth in the investment’s value, especially over a long period.

Understanding accumulating ordinary shares helps investors make informed decisions about their investment strategy, particularly if they are focused on long-term growth rather than immediate income. Exploring related concepts such as dividend reinvestment plans (DRIPs), capital appreciation, and compounding can provide further insights into the benefits and workings of accumulation shares.