The conventional method of buying stock is to open a brokerage account (usually requiring a $1000 or more initial deposit) and then pay commissions for the broker to execute your transaction. Today that’s changing. More than 1500 companies listed on major exchanges now offer small investors the option of buying stock directly from them. It’s worthwhile to learn how direct stock purchase plans (DSPPs) work and how to find out what companies you can buy stock directly from.
DSPPs are a simple idea, really. An investor opens an account with a company through a transfer agent and deposits funds in the account. Ownership of shares is then transferred to the investor. For many people low minimum investments mean they can begin building a portfolio of high-quality stocks on a limited budget. Equally important, the transfer agent charges much les than a traditional broker. In some cases the company whose stock you are buying pays some or all of the fees so your money goes to purchase shares.
Setting up a direct stock purchase plan with a company incurs a one time fee of $10-$25. Transactions cost a dollar or two as long as you use electronic funds transfer from a checking or savings account, plus 3-5 cents per share. However, there are some companies like Exxon Mobil who pay these charges for you. A DSPP can be opened for $250-$500. Almost all plans allow you to pay this in $50 per month installments automatically debited from your bank account. DSPPs are intended for the smaller investor, so most plans limit yearly investments to $150,000-$350,000 annually. When you sell shares you do pay a sales transaction fee that ranges from $10-30 per transaction plus 5-15 cents per share.
Companies offer added features to make their plans more attractive. Some will keep your stock certificates in safekeeping and allow you to transfer ownership at no charge. McDonalds offers a program for young people that lets them to start investing for just $100. In most plans you can chose to have part or all of your dividends reinvested at no charge. Most plans can be set up as IRAs or Coverdell Education Savings Accounts so you can take advantage of the tax benefits.
If you already have a particular company in mind as a possible investment, you can find out if they have a direct stock purchase plan by going to the company Investor Relations website. Some of the best known companies that offer direct stock purchase plans include Campbell Soup, Carnival Cruise Lines, Delphi Computers, Eastman Kodak, Home Depot, WalMart, Royal Caribbean, Sears, Samsung Electronics, Safeway, Radio Shack, and Fairchild Semiconductors. If you are looking for lists of companies with DSPPs, there are several large banks, including Wells Fargo and New York Mellon that act as transfer agents. Check the listings of financial companies that specialize in DSPPs. The two largest are Computershare, Inc. (computershare.com) and Sharebuilder, Inc. (sharebuilder.com).
Don’t invest in a company simply because it offers a direct stock purchase plan. Read the company’s annual report and other financial documents, check their history, current situation, and future prospects and see what independent analysis’s (the Wall Street Journal is a good source) have to say. Once you’ve satisfied yourself that a company is a good investment on its own merits, the option of using a DSPP is a great added benefit.