The vast majority of investors make their trades through brokerage accounts, which can come with relatively high fees in some cases.
The good news is that brokerage firms aren’t your only door to access the stock market. In fact, you can purchase shares of some of the world’s largest and most trusted companies directly, cutting out the middlemen and the fees that come with using them.
This is done through what’s known as direct stock purchase plans, or DSPPs.
What Are Direct Stock Purchase Plans?
When a company decides to go public and list on a stock exchange, it employs a transfer agent, a service provider who handles the administrative tasks associated with transferring shares from one party to another. The majority of companies use a service known as Computershare to handle these tasks.
Computershare offers a wide range of services, one of which is the facilitation of DSPPs, giving investors the ability to purchase a company’s stock directly from the issuer, rather than having to work through a brokerage firm.
When buying stock through a DSPP, investors have the benefit of cutting the middleman out, while still having the ability to get their hands on shares of stock at current market prices.
Features of Direct Stock Purchase Plans
There are several reasons investors might choose to take advantage of DSPPs rather than working with a broker to purchase shares of stock. Some of the most significant advantages associated with these plans include:
Traditional brokers charge relatively expensive fees when investors buy and sell shares of stock. By taking advantage of DSPPs, you’re able to avoid brokerage fees entirely, giving you the ability to hold onto more of your hard-earned cash.
Dividend Reinvestment Plans
Also known as DRIPs, dividend reinvestment plans can be set up alongside DSPPs so that cash dividends paid to the investor are automatically reinvested, giving you additional shares of stock and creating an opportunity for higher profitability.
With the vast majority of brokers, you need to buy at least one share of a company’s stock in order to invest in that company. This poses a problem when it comes to investing in large, relatively expensive companies.
For example, a single share of Amazon.com will set you back over $3,000 as of 2021, creating a challenge for new investors with relatively small portfolios.
However, with DSPPs, the amount of money you invest isn’t based on the number of shares you want to own, but on the dollar amount you’d like to put up to own those shares.
If your investment amount isn’t enough money to purchase a full share of stock, you’ll be issued fractional shares. Fractional shares receive proportional dividend payments and share in the stock’s price growth just as whole shares do.
Low Minimum Initial Investment
Traditional brokers like to see relatively large initial investments, often in the thousands of dollars. However, with DSPPs, you can generally start an account with around $100. This low minimum initial investment amount makes the stock market more accessible to everyone, particularly young adults who want to start their financial lives on strong footing.
Purchasing stock through a DSPP is a simple process, and you won’t have to have a credit card to fund your account. In fact, payments for investments are typically made by check or directly drafted from a checking account or savings account. Cash dividends are generally paid through the same method.
Working with one of these plans puts investing on autopilot, giving you the ability to schedule stock purchases based on a predetermined dollar amount on a weekly or monthly basis.
By automating the investing process, you’ll not only stick to your plan, giving you a better chance to achieve your investment objectives, but you’ll also take part in dollar-cost averaging, an investment strategy designed to reduce risk by spreading large investments over multiple small investments on a weekly or monthly basis.
DSPPs are an inexpensive way to invest, with minimal costs compared to traditional brokerage fees. To add icing to the cake, several publicly traded companies actually cover the cost of investing for you when you invest in them through a DSPP.
Fees Associated with Direct Stock Purchase Plans
Although direct stock purchase plans are inexpensive investment options, especially when compared to investing with traditional brokers, they’re not free — that is, unless the company you’re investing in foots the bill.
Here are the fees you can expect to pay when investing using one of these plans:
- Enrollment Fee. When you enroll in a DSPP, you may be required to pay a one-time setup fee ranging from $5 to $10 on average.
- Buying Shares. Every time you purchase shares, you’ll pay fees typically ranging from $0.03 to $0.10 per share.
- Dividend Reinvestment Fees. If you choose to take part in a DRIP as part of your plan, you’ll likely pay a fee when dividends are reinvested. With most plans, this fee is 5% with a cap of $2.
- Selling Shares. You’ll pay fees when you decide it’s time to sell shares you own through the plan. Transaction fees are typically $10 to $15 plus between $0.08 and $0.12 per share sold.
Although these fees are minimal compared to fees charged by traditional brokers, they can vary from one plan to another, making it important to compare your options before diving into the first DSPP you see.
Popular Companies That Offer Direct Stock Purchase Plans
It’s important to keep in mind that not all companies listed on public stock exchanges offer DSPPs, but there’s a long list that do. Just about all segments of the market are well-represented by plenty of issuers that make DSPPs available.
1. The Coca-Cola Company
If you are a new investor in Coca-Cola, you can either invest a one-time amount of $500 or 10 separate automatic purchases of $50. A once-off set-up fee of $10 is deducted from the initial investment, plus a $0.03 processing fee for every share bought.
Further purchases are set at a minimum of $50. Total stock purchases are limited to $250,000 per year. Reinvesting the dividends incurs a charge of 5% of the amount invested up to a maximum of $2.
2. Exxon Mobil
For new accounts, a minimum one-time investment of $250 is required. Alternatively, an ongoing automatic investment of $50 with a minimum of five consecutive payments gets you on board.
A nice feature of this plan is that there are no fees for account set-up and share processing. Also, there are no fees for dividends that are reinvested. Total stock purchases are limited to $250,000 per year.
3. Johnson & Johnson
This plan is quite popular for many reasons. A mere $25 gets you started, which among the lowest to be found. Plus, there are no account set-up fees and share processing charges, and further stock purchases start at $25.
Dividends can be reinvested with no fees. The maximum purchase is restricted to $50,000 per year. If you’re starting off with little money, this is the one plan you want to get.
A minimum of $250 or 10 ongoing automatic payments of $25 is required. The initial set-up fee of $20 is high compared to other plans, and the $0.05 share processing fee is above average. Thankfully, if you reinvest the dividends, there are no fees incurred.
Direct purchases are limited to $150,000 per year.
5. Altria Group
A minimum one-time investment of $500 is required; alternatively, an ongoing automatic investment of $50 — of which there must be at least five consecutive purchases — is required. The initial setup cost is $10, and a share purchase processing fee of $0.03 per share is charged.
Dividends can be reinvested, incurring charges of 5% of the amount invested, limited to $3. The maximum purchase is $250,000 per year.
Other Alternatives to Human Brokers
The first DSPP was mentioned in 1970 when times were very different than they are today. Through the years, technological innovation has changed the way consumers do just about everything, and investing is no exception.
As a result of this technological innovation, investors are now able to access the stock market with discount online brokers that offer significantly lower fees than their traditional counterparts. In many cases, these brokers offer access to stocks at a lower cost than you would pay even when investing directly.
Some of the most popular discount brokerage options include:
- Robinhood. Robinhood is a discount broker that requires no minimum deposits, minimum account balances (with the exception of margin accounts), or commissions paid on trades. Moreover, the platform offers access to fractional shares, making it possible to purchase stock in companies with large share prices regardless of the amount of money you have to invest.
- M1 Finance. M1 Finance is another discount broker, offering commission-free access to stocks, exchange-traded funds (ETFs), and other assets. As a result of the commission-free nature of the platform, using it to invest will come with a lower cost than many DSPPs.
- Betterment. Betterment is a robo-advisor that allows you to automate the investing process for next to no cost. Betterment gives you widespread exposure to the market through a list of ETFs. This is a great, low-cost alternative for those looking for market exposure without having to invest in individual stocks.
Direct stock purchase plans are a great way to invest while avoiding the high cost of working with a traditional broker. These plans help to automate investing while providing perks like low minimum investments and dividend reinvestment plans, however, there are a couple of downsides to consider before diving into them.
First, direct stock purchase plans come with minimums and often push for the residual buying of shares. For a new investor with limited capital, these requirements can limit your ability to diversify. Diversification is a key part of a quality investment portfolio and should be considered if you’re working to build one.
Second, for most investors, DSPPs are simply outdated. They were designed as a way to provide the investing public access to stock without having to pay high fees to traditional brokers. Today, technology has resulted in a better solution in the form of discount brokers, robo-advisors, and personal finance apps, many of which offer access to the market with lower fees than even direct purchase plans can provide.
That said, there are plenty of investors who swear by direct stock purchase plans and have generated wealth investing in them.
If you choose to go this route, keep in mind that any stock investment comes with risk. It’s important to do your research before getting involved in the stock market in any capacity, whether through a DSPP or otherwise.