What is a Direct Stock Purchase Plan (DSPP)?
A direct stock purchase plan (DSPP) is a program that enables individual investors to purchase a company’s stock 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. Such plans offer low fees and sometimes the ability to purchase shares at a discount. Not all companies offer DSPPs; and these plans may come with restrictions about when an individual may purchase shares. Such plans have lost some of their appeal over the last two decades as investing through online brokers has become less expensive and more convenient, though DSPPs still offer advantage for the long-term investor who doesn’t have much money to get started.
- A DSPP allows investors to buy stock 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 a simple and automatic way to acquire shares over time.
How a Direct Stock Purchase Plan (DSPP) Works
A DSPP allows individual investors to establish and account in which to make deposits for the purpose of purchasing shares directly from a given company. They investor makes a monthly deposit (usually by ACH) and the company applies that amount towards purchasing shares. Each month the plan purchase new stock shares, or fractions of them, based on money available from deposits or dividend payouts if any.
This mechanism makes it easy and automatic to slowly accumulate shares from a given company. Because these plans often have very low fees (and sometimes no fees), it makes DSPPs an inexpensive way for first-time investors to enter the financial markets. The minimum deposits for participating can range from as little as $100 to $500.
Perhaps the most common means of direct investment is dividend reinvestment, which is the act of using one’s dividends to buy more shares in the same company. For companies that pay dividends, you can set up a DSPP to purchase the shares automatically and then reinvest them through an optional dividend reinvestment plan (DRIP). DRIPs allow investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.
One drawback of a DSPP is that the shares are rather illiquid — that is, it is difficult to re-sell one’s shares without using a broker. As a result these plans generally function best for investors with a long-term investment strategy.
Direct Stock Purchase Plans and the Issuer
As much as direct purchase plans can benefit investors, they also can be worthwhile to the company that offers them. DSPPs may bring in new investors who otherwise might not have been able to invest in the company. Moreover, a DSPP can provide