What is Dividend Reinvestment Plan (DRIP)?

A dividend reinvestment plan (DRIP) takes dividends earned by investors in a company and automatically reinvests them into more stocks of that company, often at a discounted rate. A DRIP accommodates the potential for exponential earning: Dividends are reinvested in more stock, which in turn generates more dividends, and so on. However, investors are usually given the choice to reinvest their dividends or cash them out before the DRIP initiates.