Dividend re-investment is a method of compounding to give capital gains.
Some companies give their shareholders the choice of taking their dividends either as a cash payment or as shares. These shares are usually issued at slightly below market price and there is no brokerage to pay on them - making them a very good way to increase your share holding in that company.
However there can be pitfalls. In countries where capital gains are taxed it is important to record the date and price of shares acquired in this manner, since capital gains tax must be calculated on any shares which are sold. In Australia capital gains are indexed to inflation so a gain in the value of shares sold only becomes a capital gain if it is greater than the inflationary rate after the purchase of that share. Since dividends are usually paid twice per annum and the number of shares acquired at each distribution may be very small it is vital to keep a record.
Despite this small disadvantage, divident re-investment is the surest way to build up your capital base.
In order to increase your capital base it is important to place your money where it will attract interest at higher than bank rate or fees and charges will erode any gains made by interest.
The fastest way to increase your wealth is through capital gains and therefore, as soon as is feasible, it is essential to invest in something which will increase in value above the rate of inflation. The investments which have consistently shown the highest return are Real Estate and Shares - with shares consistently outperforming real estate for the past few years.