Most corporations sell or issue stocks or shares through brokers. This is especially true for publicly traded companies that have their stocks traded via the stock market and through relevant stock exchanges. However, in several instances, there is a handful of corporations that also offer stocks through a direct stock purchase plan. A direct stock purchase plan or DSPP is a program or scheme that enables an investor to purchase stock directly from the issuing company. This can be a good option for people interested in stock investing. However, in several cases, this route can also have drawbacks compared to investing in stocks via brokers.
Pros of DSPPs: Notable Advantages of Direct Stock Purchase Plan
The core characteristic of a direct stock purchase plan is that it bypasses the need for a broker. The transaction transpires between the issuing company and the investor. There is no intermediary. This comes with more specific advantages. Take note of the following:
1. Low to Zero Costs and Discounts
One of the main advantages of a direct stock purchase plan is it potentially has a lower cost than stock investing via traditional brokerage firms. The cost might be equal to or even lower than discount brokers. This comes from the absence of commissions, transaction fees, and management fees. Some issuers offer shares at a discount to actual or real-time market price.
2. Automation and Disciplined Savings
Most companies that offer DSPPs also allow their investors to enroll their bank accounts and have these accounts automatically debited at an agreed frequency. This enables investors to invest in them at regular intervals and encourages a disciplined savings habit. It also allows them to benefit from dollar-cost averaging through consistent purchase of stocks.
3. Dividend Reinvestment Plan Option
There are also companies that offer a dividend reinvestment plan option alongside their direct stock purchase plans. This related scheme or program involves reinvesting dividend payouts into more shares. This also often comes at a discount and without commissions and other fees. It also enables both dollar-cost averaging and maximizes the benefit of compounding.
Cons of DSPPs: Main Disadvantages of Direct Stock Purchase Plan
Note that the disadvantages of a direct stock purchase plan collectively center on less flexibility and options for investors. Traditional brokers can provide financial advice and most online-enabled brokers have more stocks to choose from. Take note of the following:
1. Limited Companies to Choose From
One of the main disadvantages of a direct stock purchase plan is that there are only a handful of companies that offer this scheme. Even large-cap companies like Apple and Tesla only trade their stocks via stock exchanges. Some notable companies that offer DSPPs include Amazon, Microsoft, The Coca-Cola Company, Starbucks, and Walmart, among others.
2. Restricted Options For Diversification
It is also worth mentioning that depending solely on DSPPs limits options for diversification. The best way to invest in different stocks is through brokers because they offer a wider selection of companies in the U.S. stock market and other stock markets. Some of these brokers also offer other securities and assets like bonds, exchange-traded funds, and forex.
3. Notable Unique Investment Constraints
A particular plan may limit investors on when and how they can sell their shares. It can be also less liquid than shares bought from stock exchanges or the open market. Investors also have less control in timing their investment based on current market performance. The price of a stock bought through a DSPP might not reflect real-time market price.
Important Pointers: How to Purchase a Direct Stock Purchase Plan
The advantages of a direct stock purchase plan make it suitable for first-time investors, employees of issuing companies, and those who want to diversify their stock portfolio beyond stocks bought through brokers. Investing in DSPPs is also ideal for long-term investing. However, depending on DSPPs alone is not a good investment strategy because of its limitations.
Nevertheless, when it comes to investing in stock via a direct stock purchase plan, the process involves looking for companies that offer this scheme, enrolling in the plan of a particular company, linking a bank account or choosing a fund transfer method, and setting investment preferences like automatic debiting and crediting or dividend reinvestment.
