I've recently gotten into trading stocks on the stock market, through eTrade. eTrade charges $9.99, whenever you buy stock or sell stock.
My first move on the stock market was to buy 10 shares of Garmin, the company that makes GPS devices. I told eTrade to buy the shares, when the stock went under $37. It bought the shares at $36.75 apiece. So that means I spent $360.75.
I want to make at least $20, to cover the processing fees. So when I sell the shares, I need to get $380.75. That means, I sell when the stock reaches $38.075.
But wait, there's more! Garmin is giving out a dividend of .51 on September 30th! Also December 31st and March 31st. That means they give 51 cents, for every single piece of stock. I have 10 shares, so I get $5.1. Pretty nifty!
That gives me two options. Option One is to keep the $5.1 as profit. Now I only have to make 15 dollars when selling the stock, to get a $20 profit. Specifically, I can reach that target by selling at $37.565. Notice how that's 51 cents lower than the previous target of $38.075.
Option Two is to do a drip (dividend reinvestment program). That is, eTrade takes the $5.1 profit and uses it to buy more Garmin stock, at no charge. I don't know what Garmin's stock price will be on September 30th, obviously, but let's pretend that the stock is at $37 that day. $5.1 will buy about 14% of a share. Thanks to the drip, I'll have 10.14 shares of Garmin, not just 10.
Because I have more stock, I can make my $20 profit by selling at $37.5493. That's 52.57 cents lower than the previous target of $38.075.
I wonder which option I should pick. Obviously, Option 2 has the greater potential, but it also relies on the random factor of "what is the stock price on September 30th?". I'm leaning towards Option 1, just because I'm guaranteed to get $5.1 every three months for the next nine months, so even if the stock does badly, I still have a good chance of recouping the losses.