Re-invested dividend shares.... where do they come from?

Question

Hi,

Currently I have x shares in a company. I'm set up on a 'dividend' scheme whereby at the end of each year my dividend payment is used to re-invest and purchase more shares.

So after one year I have x+y shares, but where do the 'y' shares come from? I was under the understanding that the authorised share capital of a company was finite, and that the only way to authorise more shares was to submit to Companies House. So: does this mean that for each 'new' (or reinvesting) shareholderthe company is having to re-authorise it's share capital amount? Or is there a 'reserved' pool or something similar for "new" shares?

Thanks!

Answer 1

There are two ways that a company can sell you shares. The first is to create new shares. You are incorrect to think that the company cannot do this. They can authorize the creation of new shares when they approve the DRiP program.

The second way to do this is to sell you treasury shares. Many companies participate in repurchase programs where they buy back shares in the secondary market. While most companies retire those shares, they are allowed to sell them in the secondary market, or use them for DRiP programs or employee option programs.

Answer 2

the "y" shares are generally purchased from the open market at the going rate (which always seems to go up jut prior to the purchase)
if the stock is purchased at a discount then its usually from a reserve pool or a spitting of shares

Answer 3

http://www.fairmark.com/capgain/basis/drip.htm