Direct Stock Purchase Plan - Explained
What is a Direct Stock Purchase Plan?
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Table of ContentsWhat is a Direct Stock Purchase Plan (DSPP)?How does a Direct Stock Purchase Plan Work?How are Direct Stock Plans Used? About Dividend Reinvestment Plan Pros and Cons of DSPPAcademic Research on Direct Stock Purchase Plans
What is a Direct Stock Purchase Plan (DSPP)?
The direct stock purchase plan is an alternative way of buying shares of a given company. It is a program that allows an individual investor to buy the stock of a given company directly from that particular company without engaging a broker. The direct stock purchase plan is usually associated with low fees.
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How does a Direct Stock Purchase Plan Work?
Some companies may set up direct purchase plans to enable investors to purchase shares directly from them. All that investors need to do is to directly approach the company and select the stock they feel is worth purchasing. They can do this using the available plans.
This DSPP is suitable for first-time investors. It is less expensive because investors will need a minimum deposit of between $100 to $500 to enroll. However, the challenge is where individuals need to resell their shares, and they cant do it because the direct purchase plans are not liquid. It means that it will be impossible for them to resell their shares without involving brokers. So, this plan works well for those investors with investment strategies that are long term.
How are Direct Stock Plans Used?
A direct stock plan enables smaller investors to invest in companies. They are able to buy shares directly from the businesses. Under this plan, you simply transfer saving accounts or checking to the company of choice. The company then establishes a minimum amount for investment for both initial and subsequent purchases. In some instances, these minimums are usually less than the single stocks price.
This allows investors with little capital to purchase a portion of the company's shares. Plan administrators then batch the cash from those investors participating in DSPP and use it to purchase shares of the company mostly at regular intervals at the average market price. Your banks statement will always come with the DSPP issue statements, giving you information. The information you will get is about your number of shares on the listing, any dividends you have received, and any sales or purchases made on your behalf.
About Dividend Reinvestment Plan
The best and common direct investment is that which individuals reinvest their dividends. Dividend reinvestment is where individuals purchase more shares in the same company using their dividends. If you have invested in companies that offer dividends payment, it is possible to set up a DSPP so that you automatically buy shares. You can then invest them via what we call the dividend reinvestment plan. This option allows you to reinvest your cash dividends by increasing your shares of the underlying stock on the dividend payment date.
Pros and Cons of DSPP
- The direct stock purchase plan ensures simplicity. All that investors are required to do is send money directly to the company they wish to invest in, and they get enrolled in the plan.
- Direct stock purchase plans are commission-free or relatively low. Note that on rare occasions you will come across a plan that is without commission charges. But with DSPP, the fee involved is usually low compared to that of brokerage services.
- There is uncertainty when it comes to trade date and the stock price of DSPP. Whether you are in a monthly plan or a one-time purchase, you will have no control over the trade dates as well as share price. The reason is that using a transfer company, there may be a delay in transactions, for several weeks. It means that the purchase will have to go through the stock price at that particular time.
- The main principle of investing is to ensure diversity in your investments. So those investors who opt for DSPP may be forced to have several portfolios across multiple industries to ensure diversification of their investments. If not, there is a possibility of an average investor experiencing inadequate diversification with DSPP, which is a risky venture.
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