A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker and get it directly from the company instead.
The benefits include that there are oftentimes no brokerage fees. Meanwhile, discounts to the share prices may be available for larger purchases. With shares purchased through a DSPP, investors have the same profit and loss opportunities, access to dividends, as well as stockholder voting rights.
This common investment strategy can also work for people who want to focus on a select number of quality stocks, long term. It might also help people who want to have a direct method of ownership, without an intermediary. Some investors also appreciate that some DSPP programs offer dividends reinvestment plans.
Conversely, this may not be the preferred method for investors who value portfolio diversification, because not all stocks offer DSPPs. Companies also often put maximum limits on how much an individual investor can purchase. And when selling DSPP stocks, multiple types of fees can sometimes be charged.
Here’s a closer look at direct stock purchase plans.
Direct Stock Purchase Plan, Explained
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, The stores then sell those vegetables to the consumer. This is comparable to investors using a broker to buy shares of stock, because a middleman is involved.
But you can sometimes purchase food directly from growers, perhaps at a farmer’s market. This direct form of purchasing can be comparable to participating in a direct stock purchase plan.
Many blue-chip stocks tend to offer DSPPs. For example, let’s say Company X offers a plan that allows investors to buy $500 or more worth of company stock directly from it, up to $250,000 a year, with some service and transaction fees.
With a DSPP, investors directly purchase shares sometimes at a small discount. Discounts can range from 1% to 10% to encourage investors to buy more shares.
Briefly returning to our vegetable analogy, buyers can sometimes get a better price from a farmer’s market, because the distributors and grocery stores may mark up their prices to cover their own costs. But many brokerage accounts now waive fees and commissions entirely for many investors, the difference is smaller than it used to be.
How To Invest in a DSPP
Armed with information about how to buy directly from companies, investors may want to explore what specific opportunities exist. Perhaps they 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 the Internet broadly to see which direct stock purchase plans are available. A service like Computershare provides a listing of companies that sell stocks through a DSPP.
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. In some cases you can write checks as well.
Then, that dollar amount is applied toward purchasing shares in that company’s stock, which can include fractional 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.
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. In some cases, initial deposit minimums can be waived if you purchase a certain dollar value of stock every month.
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, direct stock purchase plans 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 investment fees, including ones for each purchase transaction or sale. Although they may be small, 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.
Plus, any time a share is purchased, some degree of stock volatility 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. When you diversify your investment assets, 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.
At a high level, direct stock purchase plans are when individual investors can directly purchase shares of that company’s stock without the need for broker involvement. The benefits of DSPPs include often offering company shares at a discount, as well as helping investors who want just a smaller number of well-established stocks.
The downside of DSPPs is that a limited number of companies offer them, which means that an investor who invests solely through DSPPs may not have the best portfolio diversification. Plus, with brokerage commissions and fees rapidly shrinking, in many cases to zero, DSPPs have become a less essential way of cutting down trading costs.
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