A Direct Stock Purchase Plan (DSPP) can be a cost-effective method for investors to accumulate shares in a particular company over time. It’s become less popular as investing has become cheaper through online brokers. But direct stock purchases can still be an effective way to invest. If you’re thinking about using a DSPP, you need to understand how it works. This includes knowing all expenses and fees associated with the plan. Let’s dig in and find out more about Direct Stock Purchase Plans.
What Is a Direct Stock Purchase Plan (DSPP)
A Direct Stock Purchase Plan allows investors to directly purchase shares of a company’s stock from the company. You don’t need to use an online stock broker or financial advisor. The company may offer the plan directly or use a transfer agent. Transfer agents perform several administrative functions related to a company’s stock but are not part of the company. These functions include recording transactions and issuing stock certificates, among others.
DSPPs generally operate on a fixed schedule. This allows investors to invest a fixed dollar amount in shares of the company’s stock, which is a form of dollar-cost averaging.
How a Direct Stock Purchase Plan Works
If you’re interested in purchasing a company’s stock via a DSPP, you must establish an account with the company. Do this either directly with the company or through its transfer agent. You’ll be required to make periodic deposits into your account, which will then be used to purchase shares. Typically you make these deposits each month via ACH transfer. Set up your account to make these deposits automatic.
Each time shares are purchased on your behalf, they are entered into your account with the plan. The shares accumulate until you sell some or all of them or transfer them to an outside brokerage account.
A common variation of the DSPP is the Dividend Reinvestment Plan (DRIP). A DRIP automatically reinvests dividends in shares of the company’s stock. As with a DSPP, you need an account with the company or its transfer agent.
Direct Stock Purchase Plans and Issuers
DSPPs certainly benefit investors who use them to accumulate shares in the company. The low minimums help smaller investors invest in the company’s stock.
Companies also benefit. The DSPP serves as a means to raise additional capital and expand the shareholder base.
Companies usually put information about their DSPP on their website. The details include minimum investments, any fees associated with the program, etc. This, in and of itself, helps generate some additional interest in the company.
Benefits of a DSPP
A Direct Stock Purchase Plan has several benefits for both investors using the plan and for the company issuing the plan.
Benefits for the investor in the DSPP include:
- It’s generally a low-cost option to purchase and accumulate shares in a company.
- As a form of dollar-cost averaging, this can be an easy and painless way to accumulate shares in the company’s stock. Depending upon the fees and costs associated with the plan, it can be cost-effective as well.
- Since there is no broker involved, you pay no commissions to purchase the shares.
- DSPPs benefit smaller investors who are trying to build a position in the stock.
But be aware that:
- Though a DSPP is a good way to build a single stock position, you need to build a diversified portfolio with investments made elsewhere. This might be DSPPs for other stocks, a taxable brokerage account, an IRA, or a workplace 401(k).
- You generally have little control over the trade date for the shares. The company’s transfer agent decides these dates. For those looking to accumulate a position in the shares over a period of time, this shouldn’t matter on the purchase side but could be an issue if you want to sell some or all of the shares.
Now that you can invest in fractional shares at several major brokers and custodians, some people think DSPPs no longer offer the advantages they once did. Many online brokers offer options that might be as good as or better than a DSPP.
>>Further Reading: How to Invest in Stocks
How to Begin a Direct Stock Purchase Plan
If you decide to start investing via a DSPP, open an account with the company or with their transfer agent. Company plans differ and have different requirements. To get started,
- Complete the enrollment form. Most companies offer this online, but you might be able to complete a hard copy and mail it in if you prefer.
- Some companies require a minimum initial investment. And some also require a minimum ongoing investment level.
- If you have purchased stock directly from the company previously, additional investments made via the DSPP will be added to your account.
- Set up automatic payments if you want your funds to be automatically contributed from a bank account.
- You likely have the option to have dividends reinvested in additional shares of the company’s stock.
When starting a DSPP, make sure you understand how to stop your investments into the plan. Also, know how to either sell your shares or move them to another custodian.
Why Companies Offer DSPPs
Direct Stock Purchase Plans offer companies a steady source of funds and another way to raise capital. Most people invest only a small amount. But if the plan accumulates a decent number of participants, the money adds up. Advantages to the company:
- A DSPP helps the company build a stable base of shareholders.
- DSPPs help build a loyal, stable base of long-term, dedicated shareholders.
- The DSPP provides a platform for the company to engage directly with shareholders.
DSPP Is Just One of Many Ways to Invest in a Company
A Direct Stock Purchase Plan can be a convenient, low-cost way for an investor to accumulate shares of a company’s stock that interests them. As another form of dollar-cost averaging, you set the dollar amount you want to invest. Do this regularly and slowly grow your investment.
However, with the increased availability of fractional shares of stock available at several major custodians and online brokers, the need for a DSPP may be diminished. It’s still an option that could be worth considering if there’s a particular company you want to invest in.
Written by Roger Wohlner.
View the original article at here.