Direct Stock Purchase Plan
Many people would like to begin building an investment portfolio but have limited money to spare, especially when just starting their careers. The traditional route to investing in stocks for these people has been the mutual fund. In recent years, however, an alternative approach has become increasingly popular. The direct stock purchase plan, or DSPP, allows investors to begin with small initial investments. In addition, low transaction fees take a much smaller bite out of the money invested than do traditional broker's commissions.
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Identification
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A direct stock purchase plan is a program set up by a company to enable investors to purchase its shares from the company rather than through a broker. To do this the company retains a third party "transfer agent," such as an investment company or bank (this is required by law) to handle the actual transactions. The investor enrolls in the company's DSPP through the transfer agent and pays only modest fees to cover the cost of the transactions. Some corporations, like Pfizer and Exxon Mobil, pay the transaction fees for the investor for purchases of stock.
Features
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To enroll in a DSPP an investor typically must have an initial investment of $250 to $500 and may add to that later or not, as she chooses. Nearly all DSPPs allow you to meet this initial requirement by authorizing monthly automatic debits (usually of $50 each). Fees are normally $1 to $2 per transaction plus a few pennies per share. Most direct stock purchase plans include features like free dividend reinvestment, storage of stock certificates at no charge and the option of setting the plan up as an IRA. Some offer special features. McDonalds, for example, allows minors to start investing for as little as $100 (all figures as of 2009).
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Setting Up a DSPP Account
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It is not at all complicated to set up a DSPP account. You may call or go online and obtain copies of the plan prospectus (often called "the plan brochure") and enrollment form. The complete terms and conditions of the plan will be stated in the prospectus. Once you have read it, you need only complete the form and mail it to the transfer agent, along with a check and/or authorization for debits from your bank account. Most plans do charge a one-time setup fee of $10 to $15.
Providers
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There are several ways to locate companies that offer direct stock purchase plans. You can check on a company's Investor Relations website. If the company has a DSPP, it will be featured along with contact information for its transfer agent. A few transfer agents handle many corporations and have online listings you can browse. Two of the largest are Computershare.com and Bank of New York Mellon (see links in References and Resources). There are also free listings available from investment advice providers like DirectInvesting.com and Buyandhold.com (see links in Resources).
Pros and Cons
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The advantages of direct stock purchase plans are straightforward. The low transaction fees can save investors a good deal of money, although it is worth noting that the cost of selling stock from a DSPP is higher than for purchases. DSPPs allow people with small sums to invest to start a stock portfolio or to diversify it even on a restricted savings budget. However, you must have a separate plan for each company where you invest. You can buy and sell only that company's shares from a given plan. Also, because of the higher sales fees, DSPPs are not suitable for traders who want to buy and sell stocks on a short-term basis. Finally, although DSPPs are ideal for many investors when available, not all companies provide this option.
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