Direct Stock Purchase Plan (DSPP)

A strategy that enables investors to buy shares in a firm straight from the business rather than through a middleman. 

Author: Raghav Dharmarajan
Raghav Dharmarajan
Raghav Dharmarajan
A recent graduate from Heriot-Watt University, pursuing my interest in finance having engaged in Global Trading Competitions held by Bloomberg, and collaborating with students and professionals across the world. A market research analyst with experience assisting in the management of a multimillion-dollar portfolio encompassing Fixed-Income Instruments, Equities, FOREX, and Commodities. I leverage technical and fundamental analysis on platforms like TradingView and the Bloomberg terminal to provide strategic suggestions on stocks and bonds. My continuous equities portfolio management through Interactive Brokers demonstrates my analytical approach and commitment to providing important insights.
Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:December 31, 2023

What is a Direct Stock Purchase Plan (DSPP)?

A direct stock purchase plan (DSPP) is a strategy that enables investors to buy shares in a firm straight from the business rather than through a middleman. 

While not all publicly listed businesses provide direct purchase plans, some of the largest and most well-known firms in the United States do, notably Campbell Soup, Walmart, Coca-Cola, Intel, and Starbucks.

One of the advantages is that there are rarely any brokerage charges. Alternatively, bigger transactions are often eligible for stock value incentives. Investors who buy stocks through a DSPP enjoy identical gain and loss chances, payout accessibility, and shareholder voting power.

This popular investing technique can also benefit investors who wish to fixate on a small selection of high-quality shares over the long run. It also benefits those seeking a simple way of owning without using a middleman. 

Several traders enjoy the fact that specific DSPP schemes provide dividend reinvestment options.

However, since only some equities provide DSPPs, this might not represent the best option for individuals who seek diversified portfolios. 

Firms frequently impose maximal purchase caps on independent investors. Additionally, while selling DSPP shares, various fees may be imposed.

During the past twenty years, DSSPs have lost part of their popularity as trading via Internet brokerage firms has become less costly and more straightforward. However, DSPPs provide an edge for the long-term trader with few funds to get started.

Key Takeaways

  • Direct share purchases may be a quick and affordable approach to purchasing individual shares.
  • Most firms that provide direct purchase options are established and reliable and distribute dividends consistently.
  • Direct stock purchase plans aid traders who seek only a few well-established shares by frequently providing corporate shares at a discounted price.
  • Traders can buy company stocks using direct purchase plans for as little as $25.
  • When purchasing a direct purchase deal, traders need to understand what the precise stock value would be.
  • A small number of firms provide plans which have the potential to restrict investing options and approaches.
  • While some direct stock purchase plans are free, the rest charge nominal fees.

How a Direct Stock Purchase Plan work?

Direct stock purchase plans are a straightforward and low-cost solution for people to begin investing in single shares. In addition, the ability to reinvest dividend payouts is an additional incentive.

Some firms might put in place direct purchase plans to allow individuals to buy stock through the company. All traders must do is contact the firm individually and choose the share they believe is worthy of acquiring. They can accomplish this by utilizing the existing plans.

A DSPP allows regular traders to open an account and transfer funds to purchase stocks effectively from a business. The investor makes a periodic contribution (typically through an Automated Clearing House or ACH), and the firm uses that money to buy stocks.

Direct stock purchase options collect orders and execute genuine share transactions on a fixed timetable at an average cost for a given day, week, month, or any duration. When you submit a purchase request, you need to know the precise stock value.

This approach gradually makes acquiring stocks in a specific firm simple and automatic. 

Since these schemes frequently have very minimal (and occasionally no) costs, they are an affordable method for first-time traders to explore the stock markets. Participation requires a minimal fee ranging from $100 to $500.

These details, along with the costs, conditions, and limitations, are outlined in plan documents, which must be properly studied before investing. Specific programs allow you to create limits and market-rate sell orders.

Dividend reinvestment programs, which enable traders to acquire additional stocks with cash received as dividends routinely are an alternative type of direct share acquisition.

On the contrary, these are considered too limited for individuals who seek wider options for firms or wish to become more involved traders. 

DSPPs are also ineffective for individuals who wish to trade options or shift funds into and out of shares to benefit from tax reductions.

How does someone invest in a Direct Stock Purchase Plan?

Having already discussed how a DSPP works, we will now describe how to trade in a direct stock purchase plan. Investing in stocks using a DSPP differs from doing so through an ordinary stockbroker.

Look For Firms That Provide Direct Stock Purchase Schemes

A direct stock purchase plan is only available in some firms. So, the initial task is to determine whether firms enable individuals to buy their stock directly from them. You can conduct a broad online search for firms that provide DSPP.

If you have a specific firm in mind, you can check the webpage's investor relations section to see if they provide DSPP. Additionally, transfer agents can provide a collection of firms that offer shares through a DSPP.

Get A Timeline For When Stocks Will Be Issued.

It is hard to predict when stocks will be issued through direct purchase plans. Knowing when the company plans to offer fresh stocks to the public can let you make smarter financial choices. 

This enables individuals to manage price fluctuation while the direct buy transaction is still being processed.

For instance, if you wish to buy a company's stock directly, you may select a three-month period in which the trade must be completed.

Predict how much loss or gain you anticipate from the share over the next three months. It would enable you to plan for market changes while mentally preparing for them.

Determine Your Minimum Level Of Investment

The least number of stocks can be bought customarily fixed when purchasing directly. This aids in budgeting and portfolio building. It also assists you in calculating expected results and establishing a deficit cutoff.

Advantages Of Direct Stock Purchase Plan (DSPP)

Direct Stock Purchase plans are very appealing ways to invest for traders fresh to the financial markets or investors who start with limited fixed capital.

There are many factors why individuals may choose to make investments with direct stock purchase plans instead of going through a broker. Some of these are discussed below.

Investing Made Simple

Buying using a DSPP improves the investment process. Several characteristics must be considered before selecting a stockbroker. You must determine, among some other elements, the level of protection, the number of trading assets, the baseline capital balance, and the payment methods.

This approach can be time-consuming because you must choose a stockbroker who fulfills your requirements. When acquiring stocks directly, this procedure does not exist.

Reduced stock value

If you get stocks directly, you pay less than the present market value. This gives you an advantage in revenue generation because you will not incur transaction fees or charges.

Eliminates short-selling

Purchasing stocks through direct stock purchase plans eliminates short-selling since stocks bought directly from the company cannot be shorted. This minimizes the share's short interest rate and any instability that could result from short-selling.

Long-term investment potential

Direct share purchasing options can be ideal long-term investing tools, particularly for individuals who use dollar-cost averaging using a consistent share purchase timetable.

DSPPs are ideal for individuals who wish to select and personally hold the shares they engage.

Instead of selecting ETFs or mutual funds, which are essentially investments in markets instead of firms, you might select full participation in the businesses you think have the strongest long-term opportunities.

Disadvantages Of Direct Stock Purchase Plan (DSPP)

As said before, DSPPs could be appealing ventures for traders. Even so, these types of investment strategies may have some unfavorable effects. Moreover, besides, every element of life has its benefits and drawbacks.

Some drawbacks of DSPPs are discussed below.

Lack Of Flexibility

The disadvantage of direct share purchase strategies is their lack of flexibility. 

You cannot purchase or trade anything other than a specific firm's stocks and do not even have exposure to the research data and other brokerage companies' facilities. 

If you wish to utilize DSPPs to acquire stock in multiple companies, you must create a different account for each of them.

An Absence Of Portfolio Diversification

One issue is that when individuals only have one direct stock purchase plan, all the active investments are in one basket due to the lack of the opportunity to broaden the assets.

When individuals purchase from a stockbroker, he or she gains access to securities that can be traded on the broker's network. Although, while purchasing stocks using DSPP, investors can only purchase one kind of stock from the firm.

Suppose you intend to create something other than a baker's dozen or multiple DSPP accounts. In that case, you will need a stockbroker arrangement that enables you to trade in several investments to gain the risk-reducing rewards of a broad financial portfolio.

Reduced Pricing And Trading Control

While buying shares directly, it is hard to predict the share value and the date on which the share will float.

A trade might occasionally take weeks to finalize. On the contrary, established brokerages allow you to get real-time shares at the prevailing market value. 

As a result, purchasing through a DSPP might be difficult for those looking to time the markets.

Purchase Limit

Stocks purchased using a direct stock purchase plan are normally limited to a certain number of shares. This could restrict investment gains, particularly if you are persuaded that the share is cheap and have the funds to invest fully.

Researched and Authored by Raghav Dharmarajan

Reviewed and Edited by Krupa Jatania LinkedIn

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