There are two kinds of dividend reinvestment plans:

• Direct Stock Plans (DSPs) allow investors immediate enrollment in a company's direct stock purchasing and dividend reinvestment plan. Usually these plans require you to buy $250 or more in stock to start, direct from the company. From that point, you may buy as little or as much stock as you like, for zero or low commissions, and have your dividends reinvested.
• Dividend Reinvestment Plans (DRPs) usually require investors to already own at least one share of stock in order to enroll in the plan. The initial share needs to be purchased from a regular broker or a third-party company catering to DRP needs. The stock needs to be registered in your name before you may enroll in the company's DRP. Once enrolled, as with a DSP, you may buy stock regularly and have dividends reinvested.

Both types of plans work similarly once started. DSPs are just easier to start than DRPs. Which type of plan you'll use depends on the plan offered by the company you choose to buy.

These plans are best to use when you want to invest small amounts of money in individual companies on a regular basis (such as monthly), and when you find a company plan with free purchases and dividend reinvestment. All plans charge a nominal fee for sales, but some plans also charge fees for purchases and even dividend reinvestments. In these cases, you may be better off using a discount broker instead. Compare the costs.

One key advantage of using DRPs or DSPs is dollar-cost averaging. If you add the same amount of money to your investments every month, you'll automatically buy more stock when prices are lower, and less when prices are higher, giving you a better average price per investment.

These plans are also of great advantage if you only have a little money to invest and wish to invest every month. Commissions at regular discount brokers might eat your principle. Free DRPs and DSPs allow all your money to work for you. Check 'em out.