One alternative to using an online discount broker to purchase stocks is by investing directly with the publicly traded company. Many companies offer direct stock purchase plans (DSPP) offering a low cost way to invest in their organization. These plans are generally set up directly with the company or are administered through a third party transfer agent.
Using a direct stock purchase plan has advantages over both traditional and online discount brokers. First, these plans avoid sometimes costly commissions and fees charged by brokerage firms. Another important benefit of using a DSPP is the passive investing opportunities that come with them. Investors can usually setup an automatic investment which transfers money from a bank account and purchases shares with the money.
For as many reasons as there are to like direct stock purchase plans, there are some disadvantages investors should be aware of.
5 Disadvantages of Investing through a Direct Stock Purchase Plan
While purchasing stock directly from a company or transfer agent has plenty of advantages, there are a few things investors should consider first. Here are 5 disadvantages for those looking to invest directly with a company instead of a broker.
- Initial Setup Fees – Several companies charge a initial setup fee when an investor opens a purchase plan account. These costs cover administrative expenses and must be paid before any stock is purchased. Most plans charge $15 and $25, which isn’t a lot but still an added expense. If the investor plans to own shares in the stock long term, then this expense is minimal compared to brokerage fees and commissions.
- Automatic Investment Fees – One of the biggest downsides of purchasing stock from a DSPP are the automatic investment fees charged by some of the companies. For example, an investor who sets up a $25 automatic investment plan through Wal-Mart (WMT) would be charged a one-time setup fee of $20, as well as a $1 ongoing fee. This $1 ongoing fee is charged every time an automatic investment is made. That is 4% of the total investment (higher than the current dividend yield of WMT). It is important to note that not all companies charge the same fees, but this is something to watch out for when you go to buy stock.
- Not for Short Term Traders – If you are a short term trader, then stick with your low cost discount broker. Direct stock purchase plans are tailored to the long term investor, not a day trader. While a DSPP may be great for a long term dividend investor, they are not as convenient to those moving in and out of different stocks in a short amount of time.
- High Initial Investment – One of the advantages of buying stock through a DSPP is the low barriers to entry. Generally, most plans require a $250 – $500 initial investment or signing up for a recurring monthly investment of $25 to $50. While most companies offer these low initial investment requirements, some make it more difficult to open an account. Aflac (AFL) for example requires a $1,000 initial investment to begin buying stock through their direct purchase plan. This can be a high initial requirement for the average investor looking to build a diversified portfolio. A large initial investment also defeats the purposes of dollar cost averaging into a stock (which is an advantage of a DSPP).
- Multiple Accounts – By purchasing stock directly from a company or third party transfer agent, investors lose the ability to consolidate their holdings. For anyone who prefers to keep their stock positions in the same account, they may want to stick with using an online broker. Since direct stock purchase plans are opened outside of any stock broker, the investor loses the ability to keep their assets in a single account which can make it more difficult to track and manage investments.
Investing in a company through their direct stock purchase plan has plenty of advantages, including no brokerage commissions or fees. While an investor may avoid certain broker fees, some companies charge administration and automatic investment fees for investors buying stock directly from them. Therefore, these plans are not tailored to the short term trader and favor the buy and hold investor over time.
Have you invested through a direct stock purchase plan? What disadvantages can you add for interested investors?
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