Direct purchase plans avoid broker fees and can be a good way for small investors to add individual stocks to their portfolios starting with relatively small amounts of money, typically $500 or less. Find out more about direct stock purchase plans, how they work, their pros and cons, and what they mean to individual investors.
Definition and Example of a Direct Stock Purchase Plan
As the name indicates, a direct stock purchase plan allows an individual investor to buy shares of a company’s stock from the company itself or, most commonly, through the company’s selected agent. Investors will need to set up an account and deposit a minimum amount. Most plans work by having investors electronically transfer money to their accounts.
Alternate name: Direct purchase planAcronym: DSPP
For example, buying stock in the warehouse shopping firm Costco costs $15 to set up an online account through Computershare, a direct-purchase agent that handles direct share purchase programs for hundreds of companies. Purchase fees for Costco can range from $3.50 for a one-time investment to $2 per transaction as well as a per-share processing fee of 3 cents. The minimum investment for a new shareholder is $250, which drops to a $25 minimum for recurring purchases or purchases made by existing stockholders. That highlights one of the advantages of direct-purchase programs, which give the option to buy a fraction of a share. In late November 2021, Costco stock was trading at nearly $540 a share. Investing the minimum $25 would allow an investor to buy about 0.045 of a share (about 1/22nd). Most direct share purchase plans also cap the maximum amount individual investors can spend. In the Costco plan, that cap is $250,000 a year.
How Direct Stock Purchase Plans Work
Direct purchase plans are a relatively simple and inexpensive way for investors to get started with individual stocks. The option to reinvest dividends is an added benefit. Direct purchase plans collect orders and make the actual stock purchases on a set schedule at an average price for the day, week, month, or another period, which means you don’t know the specific share price when you place a purchase order. These specifics—as well as the charges, requirements, and limits—are disclosed in detailed plan documents, which should be read thoroughly before investing. Some plans, such as the Costco one mentioned above, offer the ability to place limit and market price orders to sell. Another form of direct stock purchasing is through dividend reinvestment plans, which allow investors who hold shares of a company to automatically buy new shares with the money paid out as dividends. With the advent of other online stock trading platforms, accompanied by a drastic reduction of brokerage fees in the past few years, direct purchase plans aren’t as big a value as they were in the past. Investors who want more choices for companies to invest in or to be more active traders will likely find direct purchase plans too limiting. Direct purchase plans also won’t work for investors who want to trade options or move money in and out of stocks for tax-loss harvesting purposes.
Pros and Cons of a Direct Stock Purchase Plan
Pros Explained
Simple and stable: Direct purchase plans are uncomplicated and inexpensive, and they tend to be offered by stable, well-established companies that often pay regular dividends. Don’t need a broker to buy: The plans allow investors to bypass brokers and to buy fractional shares of big companies for as little as $25. Dividend reinvestment: These plans also allow investors to reinvest their dividends and manage their accounts and stock records online. Good for long-term investing: Direct stock purchase plans can be good investment vehicles for the long term, especially for investors who use dollar-cost averaging through a regular schedule of stock purchases.
Cons Explained
Purchase price and date aren’t known: Investors who buy stock through direct purchase plans don’t know the exact purchase price or when the transaction takes place, making cost-basis calculations and price transparency more challenging. Can be more expensive than online trading platforms: More investment choices are available through growing online trading platforms, which can be as cheap or even cheaper than some direct purchase plans’ costs. Plan comes with rules and restrictions: Investors need to review the plan documents closely to understand the terms and rules of each company’s specific direct stock purchase plan.
