What Direct Stock Purchase Plan Is (DSPP)?
Direct stock purchase plans (DSPP) can be described as a type of plan which allows individuals to purchase shares of a corporation directly from the company without the involvement of an broker. Certain companies offering DSPPs directly make their plans accessible to retail investors however, others use transfer brokers or other administrators from third parties to manage the transaction. These plans come with low costs and often the opportunity to buy shares at a discounted price.
There aren’t all companies that offer DSPPsand these plans could have certain limitations on when an individual is able to buy shares. They’ve lost some their appeal over the past twenty years as investing with brokers on the internet is less costly and easier, however DSPPs are still a good option for investors who does not have a lot of funds to begin with.
How a Direct Stock Purchase Plan (DSPP) Works
A DSPP lets investors create an account to deposit funds to purchase shares directly from a specific company. The investor deposits a monthly amount (usually through ACH) then the corporation uses that money towards the purchase of shares. Every each month the company buys new shares of stock of the company (or parts of it) in accordance with the funds made available through the deposits, and dividend payments, if there are any.
This makes it simple and automated to gradually accumulate shares of a particular company. Because these plans usually come with very low costs (and often free of charge) this makes DSPPs an affordable option for first-time investors to get into the financial market. The minimum deposit required for participation can be as low as $100 up to $500.
One of the most popular methods to invest directly is through dividend Reinvestment which is the process of using dividends earned to purchase more shares of that same business. If you are a company that pays dividends, you could establish an DSPP to purchase shares in a timely manner and then reinvest any dividends received by way of an optional dividend reinvestment program (DRIP). DRIPs let investors reinvest their dividends in extra shares and fractional shares in the primary stock upon the date of dividend payments.
A disadvantage of the DSPP can be that they are in liquid, it is hard to resell your shares without the help of an intermediary. This is why the plans are generally best for investors who have the long-term strategy for investing.
Direct Stock Purchase Plans (DSPPs) and the Issuer
Although DSPPs are able to be beneficial to investors, they are beneficial for the business that provides them. They could attract new investors who might not be able be able to make a decision on investing in the business. Furthermore it is possible that a DSPP can provide a business with the opportunity to raise additional funds at a lower cost.
The companies that offer DSPPs typically include information about their plan on their sites, in the shareholder relations, investor relations and frequently-asked queries (FAQ) section. You will discover information about minimums for accounts and investment minimums, as well as the fees that are applicable to their products including trading information, other details.
The Securities and Exchange Commission (SEC) supervises the activities of a DSPP just like it regulates the activities of a broker. Therefore, even though the process to invest in DSPPs is a bit different than using an intermediary, the risks that come with buying stocks are there regardless of how the stock is bought.
Limitations of Direct Stock Purchase Plans (DSPPs)
An Investment Product Past its Prime?
DSPPs were considered to be an excellent bargain in the beginning of online investing due to the fact that you needed to pay substantial management or trading fees in order to fully-service brokerage firms in order to purchase stocks. But as investing online has become more affordable over the years many of the benefits of DSPPs has been squandered.
One common benefit of DSPPs is the fact that shareholders don’t have to keep physical certificates to prove purchase. An agent records DSPP transactions directly on the company’s financial records. However, today the benefit is essentially not relevant since most stocks are stored electronically within a broker’s computer system, known as by the street names. That is to say the paper certificates have largely gone forever.
Therefore, although the concept of DSPPs is attractive, they’re not as effective in modern times.
Uncertainty over Trade Date and Price
If you make a purchase with the DSPP regardless of whether it’s an one-time purchase or join to invest monthly generally, you do not have any influence over the date of the trade. If you make use of a transfer company , the transaction might be delayed for a couple of weeks. In essence, the purchase will go through regardless of what the price is at the moment.
However, discount brokers allow traders to trade live, meaning you’re always aware of the cost.
Diversification
One of the most fundamental principles for investing is the need to diversify your investment portfolio. Therefore, unless you’re participating in many DSPPs across a range of industries and international locations or have the majority of your investment in mutual fund as well as ETFs, or exchange traded funds (ETF) or mutual funds, it is possible that you are not adequately diversifying.
In actual fact, nearly every single stock purchase, whether directly or with a broker, carries the same risk. It is important to diversify. DSPs by themselves are not enough for the average investor.
No Fees, Really?
While the fees associated with a DSPP are not excessive, it’s uncommon for a plan to be free of any charges. Some charge setup fees as well as a fee per purchase, and sales commissions.
Even small charges can accumulate in time, particularly in the case of constantly increasing the value of your investment. As with any investment, make sure you review the DSPP prospectus attentively to determine the fees you could be paying.
Special Considerations
The most significant benefit of DSPPs for individuals is the possibility to steer clear of commissions as they are not accessed through brokers. For those who are interested people, investing in DSPPs is a viable alternative. For the investor with a small budget who is willing to purchase the individual shares of one firm to be added to their portfolio, and then hold it over the long run and then sell them, an DSPP could be a cost-effective method to achieve this.
