What is a Direct Stock Purchase Plan (DSPP)?
A direct stock purchase plan (DSPP) is a program that enables individual investors to purchase a company's stock directly from that company without the intervention of a broker. Some companies that offer DSPPs make the plans directly available to retail investors while others use transfer agents or other third-party administrators to handle these transactions. Such plans offer low fees and sometimes the ability to purchase shares at a discount.
Not all companies offer DSPPs, and such plans may come with certain restrictions about when an individual may purchase shares. Such plans have lost some of their appeal over the last two decades as investing through online brokers has become less expensive and more convenient, though DSPPs still offer an advantage for the long-term investor who doesn't have much money to get started.
- A Direct Stock Purchase Plan (DSPP) is offered by employers to allow investors to purchase shares directly from the company.
- DSPPs require very little money to get started.
- Some DSPPs have no fees, but most have small fees.
- These programs allow long-term investors a simple and automatic way to acquire shares over time.
How a Direct Stock Purchase Plan Works
A DSPP allows individual investors to establish an account in which to make deposits for the purpose of purchasing shares directly from a given company. The investor makes a monthly deposit (usually by ACH) and the company applies that amount towards purchasing shares. Each month the plan purchases new shares of company stock (or fractions of shares) based on the money available from deposits or dividend payouts if any.
This mechanism makes it easy and automatic to slowly accumulate shares from a given company. Because these plans often have very low fees (and sometimes no fees), it makes DSPPs an inexpensive way for first-time investors to enter the financial markets. The minimum deposits for participating can range from as little as $100 to $500.
Perhaps the most common means of direct investment is dividend reinvestment, which is the act of using one's dividends to buy more shares in the same company. For companies that pay dividends, you can set up a DSPP to purchase the shares automatically and then reinvest them through an optional dividend reinvestment plan (DRIP). DRIPs allow investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.
One drawback of a DSPP is that the shares are rather illiquid — that is, it is difficult to re-sell one's shares without using a broker. As a result these plans generally function best for investors with a long-term investment strategy.
Direct Stock Purchase Plans and the Issuer
As much as direct purchase plans can benefit investors, they also can be worthwhile to the company that offers them. DSPPs may bring in new investors who otherwise might not have been able to invest in the company. Moreover, a DSPP can provide a company with the ability to raise additional funds at a reduced cost.
Companies that offer DSPPs usually cite information about the plans on their websites, under the investor relations, shareholder services, or frequently asked questions (FAQ) sections. Here, you will find details about account minimums, investment minimums, any fees applicable to their offerings, trading details, and the like. The Securities and Exchange Commission (SEC) regulates a DSPP’s activity just as it does a brokerage's activities. So, although the mechanism for investing in DSPPs is slightly different from going through a broker, the risks of buying stock are equally present regardless of how the stock is purchased.
Considering Direct Stock Purchase Plans
- An Investment Product Past its Prime? DSPPs were seen as a pretty sweet deal in the early days of internet investing because you still had to pay significant trading or management fees to full-service brokers if you wanted to buy stock. But as online investing has become cheaper over time, some of the original positive factors of DSPPs have faded. For example, an often-cited advantage of DSPPs is that shareholders do not need to maintain physical certificates as proof of purchase (as an agent registers DSPP transactions directly onto the company’s books). Today, however, this benefit is practically moot because most stocks are kept in electronic form in a broker's computer system — which is known as in street name — so paper certificates have well-nigh disappeared anyway. Thus, while the concept of DSPPs may remain appealing, they are no longer quite as functional in today’s reality.
- Uncertainty about Trade Date and Stock Price. When you make a new purchase through a DSPP, regardless of whether you make a one-time purchase or sign up to invest monthly, typically you will not have any control over the respective trade date, hence the share price. This is because when you use a transfer company the transaction may not happen for a number of weeks, so the purchase goes through at whatever the stock price happens to be at that time. On the other hand, discount brokers allow you to trade in real-time, so you always know the price.
- Diversification. A cardinal precept of investing is to diversify your investments. So, unless you are enrolled in dozens of DSPPs across multiple industries and internationally, or have most of your investments in index funds, mutual funds, or exchange-traded funds (ETF), you may be inadequately diversified. In fact, just about any individual stock purchase, whether direct or broker transacted, runs this same risk. You need to diversify. DSPPs on their own typically will not do the trick for the average investor.
- No Fees, Really? Although a DSPP’s associated fees are low, it is rare that a plan would have no fees at all. Many charge initial setup fees, and some charge for each purchase transaction, as well as sales fees. Even very small fees can add up over time, especially if you are slowly and automatically adding to your position. So, as with any prospectus, always read a DSPP prospectus carefully to see what fees you might be charged.
All things considered, the greatest benefit of DSPPs for individual investors remains the ability to avoid commissions by not going through brokers. For some, investing in DSPPs still is a good option. For the small investor who is ready to buy individual shares of a particular company to add to his portfolio to hold for the long term, a direct stock purchase plan may be a thrifty way to do so.