What is a Direct Stock Purchase Plan (DSPP)?

Definition and Example of Direct Stock Purchase Plans

How Direct Stock Purchase Plans Work

Advantages and Disadvantages of Direct Stock Purchase Plans

Definition and Example of Direct Stock Purchase Plans

A Direct Stock Purchase Plan (DSPP) is a program that allows individual investors to purchase shares of a company directly from the company itself. Although these plans are not available in all publicly traded companies, they are offered by some of the largest and most well-known companies in the United States, including Campbell Soup, Walmart, Coca-Cola, Intel, and Starbucks.

Direct purchase plans avoid broker fees and can be a good way for small investors to add individual stocks to their portfolios with relatively small amounts, typically $500 or less. Learn more about direct stock purchase plans, how they work, their advantages and disadvantages, and what they mean for individual investors.

How Direct Stock Purchase Plans Work

Direct stock purchase plans are a relatively simple and inexpensive way for investors to start buying individual stocks. The option to reinvest dividends is an additional benefit.

Direct stock purchase plans aggregate orders and purchase actual shares on a set schedule at an average price for the day, week, month, or another period, meaning you do not know the exact share price when placing a purchase order. These details, along with fees, requirements, and limits, are disclosed in the detailed plan documents, which should be read carefully before investing. Some plans, like the aforementioned Costco plan, offer the ability to place orders with price limits and market price for sale.

Another form of direct stock purchase is through dividend reinvestment plans, which allow investors who own shares in the company to automatically purchase new shares using the cash received as dividends.

Advantages and Disadvantages of Direct Stock Purchase Plans

Advantages:

• Simple and stable: Direct stock purchase plans are simple and inexpensive, often offered by stable, well-known companies that typically pay regular dividends.
• No need for a broker to purchase: These plans allow investors to bypass brokers and buy partial shares of large companies for as little as $25.
• Dividend reinvestment: These plans also allow investors to reinvest their dividends and manage their accounts and stock records online.
• Good for long-term investing: Direct stock purchase plans can be good investment tools for the long term, especially for investors using dollar-cost averaging through a regular schedule of stock purchases.

Disadvantages:

• No known purchase price and date: Investors purchasing stock through direct stock purchase plans do not know the exact purchase price or when the transaction takes place, making cost basis calculations and price transparency more challenging.
• Can be more expensive than online trading platforms: There are more investment options available through the growing online trading platforms, which can be cheaper or even less expensive than some costs of direct stock purchase plans.
• The plan comes with rules and restrictions: Investors need to carefully review the plan documents to understand the terms and rules of the direct stock purchase plan for each company.

Summary:

• Direct Stock Purchase Plans (DSPPs) are an easy and inexpensive way to begin buying individual stocks.
• Companies offering direct purchase plans tend to be stable and well-known, many of which pay regular dividends.
• Direct stock purchase plans allow investors to buy partial shares for as little as $25.
• Investors do not know the exact share price when buying through a direct stock purchase plan.
• These plans are offered by a limited number of companies and may restrict trading options and strategies.

Source: https://www.thebalancemoney.com/what-is-a-direct-stock-purchase-plan-dspp-5210719