Direct Stock Purchase Plans (DSSPs) allow investors to buy stock directly from companies instead of buying stock through a broker. Investing wth DSPPs is a low-cost way to invest directly with a publicly traded company. 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 set up 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.
How to Purchase Stocks
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.
Most direct stock purchase plans allow shareholders the ability to set up 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.
Automatic 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 set up 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.
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 0.5 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 set up 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.
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 an 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 between $15 and $25. This isn’t a lot, but it is 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).
By purchasing stock directly from a company or third party transfer agent, investors lose the ability to consolidate their holdings. Investors who prefer to keep their stock positions in the same account may want to stick with using an online broker. Since direct stock purchase plans are opened outside of any stockbroker, the investor loses the ability to keep their assets in a single account which can make it more difficult to track and manage investments.
Final Thoughts on DSPPs
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 set up automatic investing each month as well as DRIP (dividend reinvestment), which can be huge time and money savers.
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.
Overall, direct stock purchase plans have plenty of advantages compared to brokers, making them a viable investment tool.
Have you invested through a direct stock purchase plan? What disadvantages can you add for interested investors?