There are a number of different ways to invest in the stock market. Online discount brokers tend to be the most popular choice for buying and selling stock based on convenience and relatively low commissions and fees. Then there are traditional brokerage firms that may charge higher fees but offer more stock market advice.
Did you know that there is actually another way to invest in the stock market and you don’t have to use a broker? Several well known publicly traded companies (i.e. Wal-Mart, Clorox, McDonald’s, etc.) actually allow investors the opportunity to purchase shares of their own stock directly from them. This is known as a direct stock purchase plan and can be a low cost and efficient way to build a long term portfolio.
What is a Direct Stock Purchase Plan?
A direct stock purchase plan (DSPP) is a service offered by some companies that allows investors the opportunity to purchase stock directly from the company or a third party agent. While not every publicly traded company offers a DSPP, there are plenty of top quality dividend paying stocks that do. An investor who decides to purchase stock from one of these plans is able to eliminate the need to use a traditional or online broker.
Advantages of Investing through a DSPP
Buying and selling stock through an online broker offers a convenient and low cost way to invest. Many online brokers offer low commissions (some below $5 per trade), quality investment tools, and the ability to build a solid portfolio of stocks from a single account. While there are plenty of advantages to using an online stock broker to buy and sell stock, using direct stock purchase plans should not be entirely ignored.
Here are a few advantages of investing through a direct stock purchase plan.
- Passive Investing – Most direct stock purchase plans allow shareholders the ability to setup a recurring investment every month. Stocks can automatically be purchased using funds withdrawn from your checking or savings account on a recurring basis. This takes many of the hassles out of purchasing stock for investors looking to simplify their finances.
- Dividend Reinvestment – One option offered by most company plans is to sign up for dividend reinvestment. This is similar to setting up a DRiP through an online broker. By opting to reinvest dividends, an investor can accumulate additional shares with no additional commission or fees.
- Dollar Cost Averaging – Have you ever purchased a stock at its high and then watched it go down after you bought it? One way to avoid this phenomenon and avoid overpaying for a stock is through dollar cost averaging. Investors who decide to setup automatic investments from a DSPP are able to dollar cost average into a stock. This is a great way to build your shares in a company by paying a competitive share price over many months.
- No Brokerage Commissions – While each company’s direct stock purchase plan is different, investors won’t have to pay commissions to their online broker. There may be one-time setup fees or automatic investment fees associated with a company’s plan, but they are usually a fraction of what a broker would charge. This is a great way to reduce the cost of building a solid portfolio of stocks.
- Purchase Fractional Shares – A great thing about a DSPP is that investors can purchase fractional shares of stock. This makes it easier for the beginning investor with little funds to initiate a position in a stock. The direct purchase plans will let the investor buy fractional shares which makes it easier to start a position. For example, if a stock is trading at $100 per share and you invest $50 per month, you will purchase .5 shares.
- Low Initial Investment – Since investors can purchase fractional shares through a direct stock purchase plan, it lowers the initial investment requirement. Each plan is different, but many companies require a $250 to $500 initial onetime investment. For those looking to setup the automatic monthly investments, most plans require a $25 to $50 monthly investment for a set number of months. Either way, it doesn’t take a lot of capital to start investing through a DSPP.
Direct stock purchase plans offer another alternative to buying and selling stocks other than traditional and online brokers. These plans offer several advantages over the other methods of allocating stock, including lower fees and commissions. A DSPP also gives the investor the tools to setup automatic investing each month as well as DRIP (dividend reinvestment), which can be huge time and money savers.
Overall, direct stock purchase plans have plenty of advantages compared to brokers, making them a viable investment tool.
Have you ever purchased a stock from a direct stock purchase plan? What other advantages can you think of with these plans?
photo credit: Northfielder.