In most cases when you buy stock in a company through a broker, you are buying shares from the marketplace rather than from the company. The funds you use to buy the stock rarely go directly back to the company so they can use those proceeds to grow their business. Instead, your funds are transferred to a willing seller on the open market, which is likely another investor. However, if you are interested in seeing your funds get invested directly in the company’s coffers, there are some options.
Both publicly- and privately-owned companies will engage in private placements from time to time. The funds received from investors in a private placement are deposited directly into the company’s bank account, and can be used for general operating purposes. Private placements are more common among companies that are just starting out and need to raise capital for operating expenses. In these situations, there are often requirements that you must meet in order to be able to participate in the private placement. For instance, you must earn enough money each year, have enough assets and/or have enough investment experience to be classified as an accredited investor. Private placements in companies may also be restricted to select investors, so even if you meet the criteria you may not be invited to participate.
Direct Public Offering
To raise funds, some companies will register a formal offering with the appropriate state or federal securities regulatory agency. For a company, usually called an issuer, the process is lengthy and requires a significant amount of paperwork, regulatory filings and compliance energy to have a direct public offering cleared. However, once cleared, the company is allowed to sell shares of stock to the general public, provided certain rules are followed. As an investor, you should be able to contact your state securities office to obtain a list of direct public offerings that are currently eligible for participation. You will then have the opportunity to review the company’s offering prospectus, conduct your due diligence in research and invest at your own risk. Funds are usually deposited in an escrow account and then released directly to the company once the offering closes or reaches a certain threshold.
Direct Stock Purchase Program
Many public companies -- and some registered private companies -- have a direct stock purchase plan (DSPP), which is available to new or existing investors. These plans allow investors to buy shares of stock directly from the company on a one-time or recurring basis. Frequently there are no fees to buy shares of stock in the company, and your entire cash investment is invested in full and fractional shares of the company. For instance, if a stock is $15 and you wish to invest $50, you will be able to buy 3.333 shares of stock with your $50 rather than having to settle for three shares and have your remaining $5 not invested. In some cases, the company will even offer investors a discounted priced on shares purchased through the DSPP. Information on these plans is usually available directly from the business or the company’s stock transfer agent.
Dividend Reinvestment Program
It is also common for a company to offer a dividend reinvestment plan (DRIP), which allows you to buy more shares of stock directly from the company by using your dividend payments. While a DRIP is often part of a DSPP, sometimes companies only offer a DRIP. If you are a shareholder of record, you can choose to enroll in the company’s DRIP, and rather than receive cash payments for your dividends, those funds will automatically buy full and fractional shares of stock. In this arrangement, the cash you should have received for your dividends is instead kept directly by the corporation and converted into additional stock holdings for you.