What is a Direct Stock Purchase Plan (DSPP)?
A Direct Stock Purchase Plan (DSPP) is a way for individuals to buy stocks directly from a company rather than through a brokerage.
Typically, investors purchase stocks through brokerages, such as banks or online investment platforms. In this case, the brokerage acts as a middleman between the investor and the company, providing investors with access to a range of stock offerings on one platform.
However, brokerages typically charge commissions or currency exchange fees per transaction. Through a direct stock purchase plan, an investor can skip the middleman and purchase shares directly from a company. Although DSPPs minimize commissions, there are other drawbacks, such as purchase requirements and transfer fees.
- A Direct Stock Purchase Plan (DSPP) is a way for individuals to buy stocks directly from a company rather than through a brokerage.
- Through a DSPP, an investor can eliminate any brokerage fees associated with the purchase.
- In a DSPP, the price of each share isn’t equivalent to the market price, but rather an average price over a period of time.
How Direct Stock Purchase Plans Work
Direct stock purchase plans offer an alternative to the brokerage model most commonly used in the buying and selling of stocks. By skipping the middleman, investors can invest directly in a company while avoiding any commissions that would be paid to the brokerage.
However, direct stock purchase plans are agreements between an investor and a single company. Therefore, each company may have different requirements regarding the purchase of shares. Examples of companies that offer direct stock purchase plans are Walmart, Starbucks, and Coca-Cola.
Similar to the brokerage model, investors initiate the direct stock purchase by transferring money from their checking or savings accounts, and the money is used to purchase shares. Unlike a brokerage, direct stock purchase plans typically enforce minimum investment requirements, which limit the minimum number of shares that can be bought in each transaction.
Also, the price of each share isn’t equivalent to the market price, but rather the average price over a period of time. Funds from investors are pooled and are used to purchase shares periodically. Once the shares are purchased, the plan administrator will issue the investor a certificate that states the number of shares purchased, dividends, and other relevant information.
Direct stock purchases are managed by transfer agents, which are third-party institutions that record transactions, issue certificates, and perform administrative duties. Some of the world’s largest transfer agents include Computershare Trust Company and American Stock Transfer & Trust Company (AST).
For institutional investors that purchase large quantities of shares, direct stock purchases may be beneficial because companies can offer discounts that are unavailable through traditional brokerage models.
Direct stock purchases can provide increased communication between the investor and the company. Some corporations may also offer employee stock ownership plans (ESOP), which allow employees to purchase shares at a discounted price.
Advantages of Direct Stock Purchases
1. Offers cost savings
For investors, one of the biggest advantages of direct stock purchases are the cost savings achieved from eliminating brokerage fees. Companies may also provide price discounts and dividend reinvestments.
2. Provides a simplified purchasing experience
Avoiding the brokerage model can also provide greater simplicity in the purchasing experience.
3. Promotes stronger investor relations
For the company itself, direct stock purchases can be beneficial because it promotes stronger investor relations. Since shares are purchased directly, the company can reach out to investors directly to promote and share information.
4. Prevents short-selling
Also, shares purchased through direct stock purchases cannot be shorted, which prevents short-selling and reduces price volatility.
Disadvantages of Direct Stock Purchases
1. Charges other fees
Although direct stock purchases eliminate brokerage fees, there are still other fees that can arise, such as account setup fees, transaction fees, or fees to sell.
2. Reduces portfolio diversity and limits trading options
Direct stock purchases are between an investor and a single company. While a brokerage can offer thousands of stock options, a direct stock purchase limits the investor to one stock. It reduces portfolio diversity and limits an investor’s trading options.
With direct stock purchases, it’s difficult to know the price of each share before purchasing as the prices are an average. This makes it difficult to time the market and more complicated for investors to sell.
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