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 — often with low associated fees, and sometimes even at a discount. Many companies that offer DSPPs use transfer agents or other third-party administrators to handle these transactions. Not all companies offer DSPPs; and these plans may come with restrictions about when an individual may purchase shares.
Breaking Down Direct Stock Purchase Plan (DSPP)
Direct stock purchase plans are an inexpensive way for first-time investors to enter the financial markets, because often their minimum deposits can range from just $100 to $500. However, as direct purchase plans are rather illiquid — that is, it is difficult to re-sell one's shares without using a broker — they generally function best for investors with a long-term investment strategy.
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.
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 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.