Reinvestment

Reinvestment is the act of using income or cash flows to fund additional investments rather than consuming or distributing them. In personal finance, reinvestment refers to using returns from investments—such as interest, dividends, or capital gains—to purchase more of the same or different investments, a practice that compounds wealth over time.

In corporate finance, reinvestment describes retaining earnings or cash flow to finance internal growth through capital expenditures, research and development, acquisitions, or working capital, instead of paying out profits as dividends or buying back shares.

Strategies depend on goals, capital availability, and risk. Retained earnings increase a company's capital base but may reduce current payouts and could be subject to tax; firms evaluate projects using capital budgeting methods and hurdle rates to determine which investments meet required returns.

Dividends reinvestment plans (DRIPs) allow investors to automatically reinvest cash dividends into more shares, often without commissions, accelerating compounding.

Risks include reinvestment rate risk, especially in fixed-income investments where future yields are uncertain; opportunity cost if funds could be used more profitably elsewhere; and the potential for misallocation if projects fail to meet required returns.

Reinvestment plays a central role in growth strategies, financial planning, and wealth accumulation, linking profitability to expansion opportunities and capital efficiency.

Related concepts include compounding, capital budgeting, dividend reinvestment plans, retention ratio, and internal growth.