Lots of people buy and sell investments using a broker, but you might be wondering how to do it without one. That's where a direct investment plan comes in. It's a way to buy investments straight from a company without involving a broker.
If you really want to buy stocks from just one company directly, these plans can help you do that easily. But, be careful - if you decide to stop using brokers completely, there could be some disadvantages you'll need to consider.
Buying stocks without a broker can be easy using a company's direct stock plan (DSP). These plans were made for smaller investors to directly buy a company's stocks without a broker. To join, investors transfer money from their bank accounts.
The company sets minimum amounts needed for the first purchase and any future ones. Sometimes, these minimums are less than the price of one stock, allowing investors with limited funds to buy small parts of a company.
The people managing the plan gather the money from everyone in the direct stock plan and use it to buy shares of the company at the average market price. Just like a bank statement, the direct stock purchase plan gives statements showing important financial details, like the number of shares you own, dividends received, and any purchases or sales made.
Some companies have a thing called a dividend reinvestment plan (DRIP). They work a lot like direct stock plans but make it automatic to buy more stock as time goes on. DRIPs use the cash dividends you get from owning a company's stock to purchase more shares for you. Sometimes, using this service is free, but in some cases, there might be small fees involved.
In the United States, some brokers automatically reinvest dividends for free in specific investments for their clients.
DRIPs often come with cash investment choices similar to direct stock purchase plans. This lets you purchase more stock whenever you want, not just when a company pays dividends four times a year.
Buying stocks directly from a company is simpler compared to using a broker. While apps and websites have made broker experiences easier, with direct plans like DSPs and DRIPs, it's even simpler. You just send the money to the right place, and you're in the plan.
Direct stock plans also improve communication between a company and its investors. When you use a broker, messages from the company come through the broker, possibly getting lost among other messages. Direct communication avoids this issue.
For big investors, direct stock purchase plans might offer extra perks depending on the company. These might include undisclosed discounts on buying shares, called "waiver discounts," which aren't available to the public.
The straightforwardness of direct plans can also be a downside. If you join a direct stock purchase plan like the one from Home Depot, you're limited to buying only Home Depot stock.
But if you have a brokerage account, you can buy Home Depot stock like someone in the direct plan. However, with a brokerage account, you also have the freedom to purchase other types of investments offered by the brokerage.
For people who want to explore different choices, using a broker might be the ideal choice.
In the past, direct plans were attractive because they often didn't charge fees or had low fees for trades. But nowadays, in the digital age, many brokerages, even big ones like Fidelity and Charles Schwab, don't charge fees for online trades. Buying stocks through these fee-free brokerages is now as inexpensive as using direct plans, and sometimes it's even cheaper.
Using direct plans might make it harder for you to make timely trades. Selling your stocks isn't as easy as tapping a few buttons on an app. This is okay if you plan to keep your stocks for a long time. If you're mostly interested in getting dividends, direct plans might suit you. However, if you like to trade frequently and adjust your investments often, the restrictions of direct plans might be frustrating for you.
To check if a particular company offers a direct stock purchase plan (DSP), visit their investor relations page on their website. There, you'll usually find details on how and where to invest directly with the company. Another option is to use a website like Computershare, where you can search specifically for direct stock purchase plans using a filter.
If a company provides a dividend reinvestment plan (DRIP), you'll need to agree to a contract stating that you prefer your dividends to be used to buy more shares instead of receiving them as cash.
Please note: The information provided by The Balance doesn't offer tax, investment, or financial advice. It's presented without considering the specific goals, risk tolerance, or financial situation of any individual investor. Not all investors may find this information suitable. Past performance doesn't guarantee future results. Investing involves risks, including the potential loss of the amount you invested.
