I recently discovered that I need to invest with my Roth IRA account and I have little investment knowledge. I was thinking of investing into the NASDX and I have very basic knowledge of what dividend reinvestment options are. My options are: capital gains and dividends, capital gains only, or cash. If someone could explain this to me I would greatly appreciate it.
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“Capital gains” is another way of saying “Money you made from selling a stock”. When you buy in to a mutual fund, you’re buying into a pot of stocks that the fund managers are … well, managing. That includes buying new ones and selling old ones, depending on the investment strategy of the fund. As a shareholder of the fund, you are entitled to a portion of the money earned when the managers sell a stock at a profit. So, “reinvesting capital gains” means that the money goes into buying more of that fund, instead of the money just going into whatever your standard money account in your IRA is. If you *don’t* reinvest it, then those gains get paid into that standard money account and you can manually choose to do what you want with it.
“Dividends” are different. With capital gains and losses, you actually have to buy or sell your stock (and if it’s more than what you bought it at then it’s a gain and if it’s less then it’s a loss). A “Dividend” is actually a portion of money that a company earned and that it is paying out to the shareholders of that company. A lot of companies do it as a way to attract new investors or to reward existing investors. Most companies and funds pay out dividends on a monthly, quarterly, biannual or annual basis. So buy owning this NASDX fund, you’ll be buying into companies that most likely pay out dividends automatically – even if the managers never sell the stock, you’re still entitled to a portion of the dividends. And then like “reinvesting capital gains”, “reinvesting dividends” just means putting that money back into NASDX automatically for you instead of having you manually manage it.
Honestly don’t know what “cash” means in this context, unless it means it’s going to automatically use some or all of your actual contributions to your IRA to buy more NASDX.
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