Editor's note: Welcome to "Booyah Breakdown," an explanation of certain terms and topics Jim Cramer discusses on his "Mad Money" TV show. Feel free to
In addition, check out Zacks.com. They write their own company reports, and they're easy to understand -- and free! And you can find analyst estimates right here on TheStreet.com, in our
earnings section . In your story " Deciphering Dividends " you mentioned a DRIP program. What is it? How do I get in one, and why should I do it? -- N.M. Cramer likes companies that pay dividends because as a shareholder, a dividend is your cut of the pie. And you deserve your cut. So if you found a good company that pays a solid dividend, check with investor relations or the company's Web site to see if it has a dividend reinvestment plan, or DRIP. About 1,100 companies have them these days. That DRIP will allow you to reinvest your dividends back into the company. That means if you sign up for the company's DRIP, your quarterly dividend check will automatically be used to buy additional shares (or fractional shares) on the dividend payment date. The upside is that most company-operated DRIPs are commission-free because there's no broker required to facilitate the trade. That's a big perk for smaller investors who would otherwise have to save all those dividends checks until they had enough money to justify the trade fee. In addition, some plans allow you to buy shares at a discount to the current share price. Most DRIPS don't allow reinvestments much lower than $10, though. And you should know that to participate in these DRIPs, you have to be a shareholder on the record date. That's the day the company goes down its shareholder list to see who gets a dividend check. To ensure your name is on the list, buy the shares a few days before, to allow for processing time. Also be aware that participating in a DRIP doesn't excuse you from the tax hit. Even though you don't actually see that dividend check, it's still considered a taxable distribution to you. I often hear Jim mention limit orders vs. market orders. What's the difference? -- G.C. Great question! And it relates back to how Cramer has the ability to move the market. It often happens that he recommends a stock, and then folks run into the market to buy it. But all those buyers jack up the price. So a stock that once was cheap may no longer be attractive.
By placing a limit order, you don't have to worry about paying an inflated -- or deflated, in the case of a sale -- price. Here's why. If you place a limit order with a broker, you tell him to buy or sell a specific number of shares at specified (or better) price. So let's say you want to buy some shares at $15, but Cramer's readers already ran out into the market and bought a bunch of shares, so the stock price jumped to $20. Your broker won't execute that trade for you because you placed a limit on the buy price. So your limit order just saved you from buying a stock at a puffed-up price. But if the stock doesn't fall back down to your price target, your order may never be executed. On the flip side, a regular market order is just an order to buy or sell a stock immediately at the best available current price. So if Cramer's readers run up the stock price, your order will go through regardless. So may be buying a $15 stock at $20, which is why these orders are considered unrestricted. While you're guaranteed trade execution on a market order, there's clearly a bit more risk involved, especially in a volatile stock.
Unless you specify otherwise, your broker will enter your order as a market order. So speak up. And while some firms may charge a higher fee for a limit order because your broker has to do a bit more work, it may be worth it in the long run.