In Finance, what is a Drip Feed?

H. Bliss
H. Bliss
Man climbing a rope
Man climbing a rope

In investing, drip feed is a method in which the investor provides the company or firm with which he invests several small, steadily disbursed payments, normally in exchange for company shares. This investment method is in contrast with the more common method of providing one large investment payment up front, which is called a lump sum investment method. Usually, drip feed investing is considered to be lower risk than lump sum investment because it does not require the commitment of a large amount of cash in the early stages of a project. Drip feed investment is used both on the public stock market and in venture capital trades. Types of drip feed investment methods include dollar-cost averaging and value averaging.

This type of investing is lower risk, so it generally yields a lower profit percentage than higher risk lump sum investing. Because it is inherently a stable investment method, drip feeding is a preferred way to invest when the stock market experiences periods of unpredictability. Drip feed investment is also a popular investment option for investors with a steady flow of income to invest but too little upfront capital for a lump sum investment. Investors receiving structured settlements can begin investing sooner by making small investment contributions as money becomes available for them to invest.

Businesses seeking investors can benefit from receiving drip feed investment capital because it provides a reliable source of steady capital that can be used to cover small losses or to expand the company through small steps. Drip feed investments are usually used to grow small, existing companies with growth potential. Small, growing companies often operate with few cash surpluses and are more significantly affected by small, incremental investments. This type of investment can help a growing company to make small advances but does not usually offer the fast growth potential or surplus cash flexibility afforded by on-hand up front capital investments.

When drip feed investing is used in the stock market, the investor buys stock in a firm, delivering the investments in small transactions. Though this method of investment places less initial money at risk, it usually raises the average price paid for a stock, called the average price, because the price of the stock usually goes up for each subsequent investment. The average price is figured by dividing the total price paid for all shares of stock by the total number of stock bought or sold over a designated period of time.

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