What is a direct share purchase plan (DSPP)?
A direct share purchase plan (DSPP) is a program that allows individual investors to buy the shares of a company directly from that company without the intervention of a broker. Some companies that offer DSPPs make the plans directly available to retail investors while others use transfer agents or other third-party administrators to handle these transactions. These plans offer low fees and sometimes the ability to buy stocks at a discount. Not all companies offer DSPP; and these plans may have restrictions on when an individual can buy shares. These plans have lost some of their appeal over the past two decades, as investing through online brokers has become cheaper and more convenient, although DSPPs still offer an advantage to the long-term investor who has not not a lot of money to start.
Key points to remember
- A DSPP allows investors to buy shares directly from the company.
- DSPPs require very little money to get started.
- Some DSPPs have no fees, but most have small fees.
- These programs allow long-term investors to acquire stocks simply and automatically over time.
Operation of a direct share purchase plan (DSPP)
A DSPP allows individual investors to establish and account for deposits in order to buy shares directly from a given company. They investor makes a monthly deposit (usually by ACH) and the company applies this amount to the purchase of shares. Each month, the plan buys new shares, or fractions of shares, based on the money available on deposits or dividend payments, if any.
This mechanism makes it possible to slowly and automatically accumulate actions of a given company. Because these plans often have very low fees (and sometimes no fees), this makes DSPPs an inexpensive way for new investors to enter the financial markets. The minimum deposits to participate can range from $ 100 to $ 500.
Perhaps the most common form of direct investment is dividend reinvestment, which involves using your dividends to buy more shares in the same company. For companies that pay dividends, you can set up a DSPP to automatically buy the shares, then reinvest them via an optional dividend reinvestment plan (DRIP). DRIPs allow investors to reinvest their cash dividends in additional shares or fractions of shares of the underlying stock on the dividend payment date.
One drawback of a DSPP is that the stocks are rather illiquid – that is, it is difficult to resell its stocks without having to use a broker. As a result, these plans generally work best for investors with a long-term investment strategy.
Direct and issuer share purchase plans
Direct purchase plans can benefit investors, but they can also be worthwhile for the company that offers them. DSPPs can attract new investors who might not otherwise have been able to invest in the business. Additionally, a DSPP can provide a business with the ability to raise additional funds at a reduced cost.
Companies that offer DSPPs typically cite information about the plans on their websites, in the Investor Relations, Shareholder Services, or Frequently Asked Questions (FAQ) sections. Here you will find details on account minimums, investment minimums, all fees applicable to their offers, trading details, etc. The Securities and Exchange Commission (SEC) regulates the activities of a DSPP as well as the activities of a brokerage. Thus, although the investment mechanism in DSPPs is slightly different from that of a broker, the risks associated with buying stocks are also present regardless of how the stocks are bought.
Consider direct share purchase plans
- An investment product past its peak? DSPPs were a good deal at the start of investing in the Internet, because you still had to pay large trading or management fees to full-service brokers if you wanted to buy stocks. But as online investing has become cheaper over time, some of the positive factors behind DSPPs have disappeared. For example, an often cited advantage of DSPP is that shareholders do not need to keep physical certificates as proof of purchase (because an agent records DSPP transactions directly in the company’s books). Today, however, this benefit is practically irrelevant since most stocks are kept in electronic form in a broker’s computer system – known as rue – so that paper certificates have pretty much disappeared anyway . So, although the concept of DSPP may remain attractive, they are no longer as functional in today’s reality.
- Uncertainty about the trading date and the share price. When you make a new purchase through a DSPP, make a one-time purchase or sign up to invest monthly, you will usually have no control over the respective transaction date, hence the stock price. Indeed, when you use a transfer company, the transaction may not occur for several weeks, so the purchase is made regardless of the stock price at that time. On the other hand, discount brokers allow you to trade in real time, so you always know the price.
- Diversification. A cardinal precept of investment is to diversify your investments. So unless you are registered with dozens of DSPPs across multiple industries and internationally, or have most of your investments in index funds, mutual funds, or exchange traded funds ( ETF), you risk being insufficiently diversified. In fact, just about any individual stock purchase, whether direct or negotiated, runs the same risk. You have to diversify. DSPPs alone will generally not do the trick for the average investor.
- No fees, really? Although the fees associated with a DSPP are low, it is rare that a plan has no fees. Many charge an initial setup fee, and some charge for each purchase transaction, as well as a sales charge. Even very small fees can add up over time, especially if you add slowly and automatically to your post. So, as with any prospectus, always read a DSPP prospectus carefully to see what fees you may be charged.
All things considered, the biggest advantage of DSPP for individual investors is the ability to avoid commissions by not going through brokers. For some, investing in DSPP is always a good option. For the small investor who is willing to buy individual stocks of a particular company to add to his portfolio to keep them for the long term, a direct stock purchase plan can be an economical way to do so.