August 19, 2022
As the world of investing evolves, it’s easy to imagine Direct Stock Purchase Plans (DSPP) going the way of the dodo. DSPPs have lost a significant amount of luster in recent years. And it’s no wonder since online investing is nearly free and as easy as opening a smartphone.
Yet they persist. So what are Direct Stock Purchase Plans and how do they work?
A DSPP is a program that lets individual investors purchase a company’s stock directly from the company without a broker. The only real advantages of a DSPP for the average retail investor are that they often have low fees or the ability to purchase shares at a discount. Most have low minimums, which can help small investors. And that’s about it.
If you are still interested in purchasing a company’s stock through a DSPP, you must establish an account with the company, either directly or through its transfer agent. At that point, retail investors will have to make regular deposits that are used to purchase shares, often through ACH transfers.
Shares are then purchased on the investor’s behalf and go into the account plan, where they accumulate until the individual investor sells them or transfers them to an outside brokerage.
Investing in DSPPs definitely has disadvantages as well, especially since modern online trading is so inexpensive and quick. Since many of the discount online brokerages let retail investors invest in fractional shares, programs like DSPPs seem out of date to many. These online brokers offer options that are oftentimes as good or better than a DSPP. Of course, if investors do have individually managed brokerage accounts they can connect them to TiiCKER to find perks.
Individual investors involved in DSPPs also must beware of building a portfolio that lacks diversity since they are investing in a single stock. While online brokerages give retail investors an incredible amount of control, DSPPs are the opposite. Most DSPP investors have very little control over the trade date for the shares, which is handled by the company’s transfer agent. Since DSPPs collect orders and make the actual stock purchases on a set schedule at an average price for the day, week, month, or another period, investors don’t know the specific share price when they place a purchase order. Because of the way direct purchase plans are organized and managed, retail investors putting money into stocks through a DSPP should be prepared to buy and hold shares for the long term.
While we listed fees as a DSPP advantage, it can also be a disadvantage as well. Most companies charge initial setup costs when a retail investor opens an account to cover general administrative expenses. These costs might be low if the investor holds the stock for a long period but can be onerous if the stock is regularly traded. There are often automatic investment fees as well, which are assessed when money is deposited into the investor’s account. It can be difficult for individual investors to consolidate their holdings when they are in a DSPP and have other holdings.
A variation of the DSPP is the Dividend Reinvestment Plan (DRIP). DRIPs allow investors who hold shares of a company to automatically buy new shares with the money paid out as dividends. Just like a DSPP, individual investors will need an account with the company or its transfer agent.
Unless investing changes in some dramatic way, it’s hard to imagine how DSPPs will survive or why a retail investor would choose to go the direct rout when online stock trading platforms and their minimal brokerage fees are so prevalent. The fast-paced world of online trading makes DSPPs seem very limiting and expensive.
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