A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker. There are no brokerage fees and discounts may be available for larger purchases.
So how does it compare to stocks bought through a broker?
When you buy vegetables from a grocery store, you know farmers grow the vegetables, then a distributor might buy from the farmer and sell the vegetables to grocery stores, and stores then sell those vegetables to you, the consumer. This is comparable to investors using a broker to buy shares of stock, because there is a middle person involved.
But you can sometimes purchase food directly from growers, perhaps at farmers markets. This direct form of purchasing can be comparable to participating in a direct stock purchase plan (DSPP).
Direct Stock Purchase Plan Explained
At a high level, DSPP is a term that pretty much means what it says. When a company offers a DSPP, individual investors can directly purchase shares of that company’s stock without the need for broker involvement. If someone has a 401(k) retirement account at work and has stock from the employer’s company included in a portfolio, then this process has some similarities.
Briefly returning to our vegetable analogy, buyers can sometimes get a better price from a farmers market, because the distributors and grocery stores may mark up their prices to cover their own costs.
With a DSPP, investors directly purchase shares of stock, sometimes at a small discount, which adds value to the purchase. Discounts can range from 1% to 10% to encourage investors to buy more of the company’s stock.
More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account.
Then, that dollar amount is applied toward the DSPP, meaning toward purchasing shares in that company’s stock, which can include fractions of those shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock. (The price of a share of stock can fluctuate, but this is how the process works, overall.)
One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500, usually with very low fees to purchase shares or, sometimes, no fees.
This investment strategy can also work for people who want to focus on a select number of quality stocks, long term. It might be a good strategy for people who simply want to have a direct method of ownership, without an intermediary—and some investors appreciate the DSPP programs that allow dividends to be automatically reinvested into additional shares of stock (something that not all companies that offer DSPP programs do).
Conversely, this may not be the preferred method of choice for investors who value diversification, because buying DSPPs tends to create a portfolio based on a small group of stocks. Plus, not all companies offer this investment option, so focusing solely on DSPPs can limit choices.
Note that there may be restrictions placed upon when shares can be purchased. Companies often put maximum limits on how much an individual investor can purchase, too. One well-known home improvement store, as just one example, puts an annual cap of $250,000 on their DSPP program. And, when selling DSPP stocks, multiple types of fees can be charged that can significantly impact gains made.
Finding DSPP Opportunities
Armed with information about how to buy directly from companies, at least in general, investors may want to explore what specific opportunities exist. Perhaps they follow the stock market and already have a publicly traded company in mind.
In that case, they can go to that company’s investor relations website to see if that company offers this type of investment opportunity. They can also search on Google to see if DSPP information is available.
If investors decide to buy through a direct stock purchase plan, they can use a service like ComputerShare.com . It provides a listing of companies that sell stocks through a DSPP—these searches can be filtered in several ways to find the opportunities that fit investor parameters.
What to Consider Before Buying DSPPs
When internet investing was new, people typically needed to pay significant fees to brokers to buy stock—so, in that era, DSPPs could be real money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.
Plus, many DSPPs charge initial setup fees, and may have other fees, including ones for each purchase transaction or sale. Although they may be small, in and of themselves, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one, rather than one where investors regularly buy and sell.
Not everybody has the same type of investment personality—what’s important is for each investor to be clear about what type they are and act in tandem with that.
What Kind of Investor?
When people are relatively new to investing, they may not know the answer to that question yet—and that’s okay. As part of the process, though, investors will want to determine, at a minimum, their risk tolerance—in other words, the amount of risk a person is willing to take with investment dollars.
People who are risk takers might be what’s called a growth investor. This type of person might be willing to invest in high-priced stocks that have plenty of potential, even if they’d never heard of them before. More conservative investors can be called “income investors,” people who like to invest in stable, “blue chip” companies that are well established.
It isn’t unusual for younger investors to be more willing to go for growth, with older people going the more conservative route. This isn’t universally true, though, and it’s okay to experiment with investment strategies.
Buying That First Share of Stock
People with a retirement plan are probably already investing in mutual funds. When thinking about buying stock outside of retirement account investing, then it can make sense to complete a couple other financial items first, including:
• Getting rid of high-interest debt
• Building an emergency savings of three to six months’ worth of salary to cover unexpected expenses
Now, here’s what it means when someone buys a share of stock. Investors are really buying a piece of a company, becoming a partial owner of that company.
Then, when that company does well, investors can be rewarded by having shares of stock increase in value and/or receiving dividends. If the company doesn’t do well, then that can be reflected in a lesser stock value.
There are two main types of shares: common stock and preferred stock. Generally, when people talk about buying and selling shares of stock, they’re referring to common stock that comes with voting rights. Ideally, investors would like for the stock owned to increase in value, which would give them the option to sell their shares at a profit.
And, if the company is doing well, they may issue dividends, perhaps on a quarterly basis. Investors could use that as an income stream or reinvest those dollars into more shares of that company’s stock.
If a company goes bankrupt, common stockholders are placed behind creditors and another type of stockholders in line—preferred stockholders—in getting payment (which means common stock investors very well might lose all of what they’d invested in that company).
Owners of preferred stock, meanwhile, would get preferential treatment if a company was liquidated, being next in line behind creditors. Owners of this type of stock may or may not have voting rights but could benefit more fully when the company is profitable.
Nowadays, nearly all stock trading is handled online, which has made the process less expensive and more hands-on for the typical investor—at least compared to the days when people needed to walk into a stockbroker’s office to place an order.
Today, they simply need to open up an account with an online brokerage firm and then they can typically handle transactions from their computers or mobile devices. This, of course, raises the question about where a brokerage account should be opened. New investors can compare fees, as one step, while noting that it might be worth it to pay a bit more if the service is good.
When it’s time to actually buy that first share of stock, the decision may be made to invest in a company that is already familiar to the investor—and then invest a small amount as a trial.
Any time a share of stock is purchased, at any company, some degree of risk comes along with it—how much depends upon what is happening with that specific company and the overall levels of turbulence in the market.
Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified.
Portfolio diversification is desirable because it helps to spread out the degree of risk—that’s because, if one stock’s value decreases, others may rise to balance out that portfolio. Some investors, for example, have a portfolio with 40 to 50 different stocks to provide diversification.
Researching Investment Opportunities
Before investing in a company, it makes sense to research how well they’ve been performing. How profitable have they been? How do they compare against their competitors?
Most companies must provide information about their financial performance and major corporate changes; this information can be found on a company’s website in the Investor Relations section or at the Securities and Exchange Commission site.
Before investing, it can make sense to look at a company’s quarterly and annual balance sheets, as well as their income statements and cash flow statements. Another strategy is to review their retained earnings statement and shareholders’ equity information.
When reviewing a company’s financial information, check its after-take income—or what’s often called their “bottom line.” This is the number that’s most watched by a typical investor because it’s often directly related to the price of that company’s stock.
This information can be found in quarterly and annual financial statements and, besides looking at how good current earnings are, it can make sense to check the statements to see how consistent earnings have been.
Another idea is to review return on sales, also called operating margins. This will show investors how much a company makes in profit after paying associated costs, not including interest or taxes. To calculate this metric, find the company’s operating profit and then divide it by its net sales. A good (higher) number is a positive sign while a lower number may indicate more risk for investors.
As another strategy, check the cash flow statements—cash flow has been described as the life’s blood of a company’s financial position. Then there’s a calculation known as asset utilization, and it helps people to know how well a particular company is doing when compared to other ones.
If someone is considering investing in Company A, for example, and that company has revenues of $200,000 and assets of $100,000, its asset utilization rate is 2:1. In other words, for every dollar they have in assets, they have $2 being generated in revenue. How does that compare to Company B? Company C?
Investors sometimes also review a company’s debt-to-equity ratio (also called debt-to-capital ratio) to determine how a particular company funds its business operations and pays for its assets. Ideally, a company will have enough short-term liquidity to pay for business operations as well as its growth. This figure does not take into account any long-term debt held by the company.
Are its earnings going up, overall? Are there noticeable patterns—perhaps lower earnings in the winter for outdoor entertainment corporations? When lower earnings exist, does it fit the seasonal pattern observed—or is something else potentially going on?
Besides doing investigative work, investors might want to read financial news, with reputable sources including The Wall Street Journal, Bloomberg, MarketWatch, and CNBC, among others.
Investors can browse through them to see how the market is doing, overall, as well as how individual sectors are performing. If interested in specific companies, they can read about their performances.
Considering Exchange-Traded Funds and Mutual Funds
If someone is new to investing, choosing exchange-traded funds (ETFs) and mutual funds may be a good introduction to the investing world. These types of investment vehicles can offer more diversity, which can help to mitigate risk. One way to think of ETFs is as a basket of securities that gives investors access to a broad variety of markets.
Mutual funds, meanwhile, also provide opportunities for people who want to get started investing with small amounts of money. Because mutual funds are like suitcases filled with different security types, they provide instant diversification.
When it’s time to start investing online, that’s also the time when people need to choose their broker.
With SoFi Invest®️, people can invest with ease, no matter what level of investment experience exists.
One option is the active investing route, choosing stocks, ETFs, and cryptocurrency, getting started with as little as $1 and avoiding the high costs associated with some other methods of investing. And, at SoFi, stocks and ETFs can be traded for free.
Because diversity is so important, SoFi makes it easy for investors to spread their money out over different investment vehicles, including Stock Bits, which allows people to invest in their favorite companies without needing to commit to a whole share.
Or, if investing sounds like a good idea but the heavy lifting involved doesn’t, there is the automated investing option.
Recommendations are made through sophisticated computer algorithms and help with goal-setting, rebalancing of portfolios, and diversification. Best of all, when choosing automated investing at SoFi, investors can still have access to human financial advisors.
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