What Is a Direct Stock Purchase Plan (DSPP)?

Nov 2, 2021 01:23 PM ET
What Is a Direct Stock Purchase Plan (DSPP)?

Investors often choose to buy stock directly from a corporation rather than through a brokerage firm. This is referred to as a direct stock purchase plan (DSPP). 

One of the advantages is that investors get to bypass brokers, thereby avoiding brokerage costs. In addition, larger purchases of shares may qualify for discounts on the stock price.  Investors who purchase shares through a DSPP enjoy the same profit and loss potential, as well as equal access to dividends and stockholder voting rights of other stockholders.

Individuals who desire to invest for the long term in a small number of high-quality companies might use this prevalent investment technique.

How DSPP works

In their effort to increase the uptake of their shares, some companies sell their shares directly to investors. This is often seen as a simpler method of buying a stock because an investor goes directly to the company. They then find out if the company would be willing to sell them a specific number of shares and for how much. 

The process effectively eliminates brokers, but you have to wire the payment from your bank account, just as you would do with a broker. However, you will have to contend with a number of minimum investment requirements that come with DSPPs. One of the key reasons for the requirements is controlling the number of shares bought per transaction. This is a mechanism that helps the company achieve stability in its stock price. 

It's also worth noting that when you use this approach to buy stock, you will pay based on an average price calculated over a defined period and not the current price. Once you finish your purchase, you will be issued a certificate containing the transaction details. The certificate acts as proof of your ownership of the stock. However, you won’t always deal directly with the company when undertaking the transaction.

In most cases, the task will be carried out by an appointed transfer agent, who acts as an intermediary between you and the company. They keep track of the transactional data, issue certificates, and handle other administrative tasks.

DSPPs may be advantageous for institutional investors buying large volumes of shares since companies can provide discounts not available through standard brokerage arrangements.

When an investor purchases stock directly from the company, through DSPP, it sets a platform for the investor and the company to communicate more effectively. Companies may also provide employee stock ownership programs (ESOP) that allow employees to buy company stock at a discounted price.

However, DSPPs can be a hindrance because they lack liquidity, which creates a problem when investors need to resell their shares. This means that they will be unable to resell their shares on their own without the assistance of brokers in the process.  

Important things to think about before signing up for DSPP

Investors had to pay considerable fees to brokers when Internet trading was new. Therefore, DSPPs saved investors a lot of money. However, online investing fees have decreased over time, so this benefit is no longer as noticeable.

Aside from that, many DSPPs charge a startup fee and may have additional investing costs, such as fees for each purchase or sale transaction. These charges, no matter how little at first glance, can add up over time. Reselling shares without a broker can be difficult; therefore, DSPP should be looked at as more of a long-term investing plan.

Aside from that, buying a stock entails some degree of stock volatility; how much depends on the specific firm and the overall amount of market turmoil.

Another thing to keep in mind is that portfolios that contain only a few stocks from a single firm aren't diversified. Investing diversifies your risk because if the value of one stock falls, the value of others may rise to equalize your portfolio.

Pros and cons of DSPP

Pros

  • There are no or modest commissions on direct stock purchases. Keep in mind that you may come across a plan that has commission fees once in a while. However, compared to brokerage services, the price associated with DSPP is typically minimal.

  • It is a simple and direct way to own a piece of a company. This plan enrolls investors in a single transaction: sending a check for the amount they intend to contribute straight to the company.

Cons

  • Investment diversification is a key rule. As a result, investors that choose DSPP may be required to diversify their portfolios across several industries. Otherwise, an average investor could encounter inadequate diversification, making it a dangerous investment. 

  • The data associated with DSPPs is often difficult to link to the actual price of the stock. Whatever plan you choose, you'll have no influence over when trades will occur or how much the stock will cost.

  • There may be a delay of several weeks if you use a transfer for your transactions. So, if you want to buy something, you'll have to factor in the current stock price.

In summary

DSPP is an alternative method of purchasing stock of certain corporations. If you're looking to acquire stock directly from the corporation, you can use this approach to avoid using a broker. DSPPs usually have low costs. However, they can have significant transaction costs over the long term. In addition, investors can only sell stock purchased via DSPP through brokers. Investors need to weigh these factors before settling on this option. 

Tags:

436


Don't miss: The Best Forex Robots in 2022

Best Forex Robots

Best Forex Brokers