Otherwise known as a dividend reinvestment plan, a DRiP is an excellent way to secure long-term wealth. Allocating funds into specific vehicles can prove fruitful. Fractional shares of underlying stocks provides one example. DRiPs are frequently offered to shareholders of specific corporations. The average plan provides other advantages too. Commission-free purchases and reduced prices when compared to the underlying share price are common.
We should note that these plans tend to be suited to long-term financial goals. It is wise to balance any investment strategy with short-term ventures. Being able to enjoy a predictable source of cash for emergencies is beneficial. How can you achieve this?
Emergencies Can and Will Occur
In life, there are going to be instances when you need immediate access to liquid assets. These funds allow you to address any number of unpredictable financial issues. It is prudent to allocate at least 10 percent of your income towards more fluid positions. Safeguarding against situations outside of your control will give you peace of mind. The main issue involves how to create a "buffer zone" without placing yourself at further risk. This is where trading the financial markets may accommodate your needs. Let’s take contracts for difference (CFDs) as an example.
The Online CFD Edge
Contracts for difference is one mode of trading that could help you save. Profits can be put towards an emergency fund. There are several advantages associated with these products, including:
Low transaction costs;
The ability to trade on margin;
A choice of thousands of financial instruments;
The possibility of enacting long or short trades (within rising or falling markets).
CFDs are also excellent options due to the fact that the contract size is usually not fixed. This will depend upon the online broker you choose. It’s also the main reason why it’s prudent to choose well-known platforms. Buy or sell using units that represent the value of different products like shares. Since you never become the owner of those shares, for example, CFDs provide more flexibility than standard investments.
Appreciating the Downsides
Risk aversion is always a very real concern. You want your nest egg to grow. Withdrawing funds to cover losses will not be beneficial.
It would be irresponsible if the risks associated with CFDs were not mentioned. The main downside is that leveraging (margin trading) can exacerbate any losses. Low initial capital requirements also cause many novices to over-trade a specific position. This leads to excessive debt within a short timeframe. Make sure you put stop-loss orders in place with your broker to lower disappointments.
Over and above CFDs, there are other methods to consider. Contemplate different markets, such as currency trades. These can contribute to your sense of liquidity within a short period. You might also choose to put any income derived from dividends into such sectors. On a final note, never be afraid to leverage the power of safe-haven assets such as precious metals. These can represent excellent options. That's particularly true if the markets begin to exhibit bearish trends. Either way, you can direct any accrued profits towards your emergency fund goals.
Dividend reinvestment plans come with a host of benefits. But, it’s still important to allocate a certain amount of money to other ventures. This can cover unpredictable events, without taking away from your nest egg. Consider these suggestions with care. Each can be employed alongside the others to create a fiscal "firewall” for the future.