Direct Stock Purchase Plans: A Comprehensive Guide

There are currently hundreds of companies that offer direct stock-purchasing plans. Also known as no-load stocks, most of them are available from large, established and well-known companies. Investors interested in purchasing stock directly from one of these companies can call a toll-free number and request information and an application. After evaluating the data, the investor can open an account by depositing at least the minimum amount required with the company (most companies offer small minimums, between $100 and $500; although some are as low as $50 or even $25). Once the account is opened, automatic debits can be set up to electronically take payments from a checking or savings account periodically in order to purchase additional stock, allowing the investor to take advantage of dollar-cost averaging.

Dollar-cost averaging – which is one of the best ways to invest regularly and consistently – permits an investor to lower his or her overall cost-per-share by buying more shares of stock when the price is down and fewer shares when it's up. By using a direct purchasing plan, an individual can easily and efficiently enjoy the benefits of dollar-cost averaging. But direct purchasing plans are not free. Investors may be charged a one-time account set-up fee, an annual maintenance fee, and per-transaction fees. However, these operating fees still tend to be lower than most brokerage commissions.

Another advantage of direct stock purchases over buying through a broker is that they allow investors to buy fractional shares. For example, if a particular stock were trading at $40, a $100 purchase of the stock through a broker would get the investor only two shares. The remaining $20 would not be invested, going instead into a cash account or toward brokerage fees. But if the company offered a direct purchase plan, not only would the two shares be acquired with the $100, the investor would also obtain an additional one-half share. Over time, those fractional shares add up, especially when dividends that may not cover the purchase of a full share are reinvested. In addition, some companies allow the purchase of new shares at a discount price below market value when dividends are reinvested.

Of course, direct purchase plans also come with a few disadvantages. For instance, when investors study stocks for purchase, they normally evaluate a number of different criteria, including share price. With direct purchase plans, investors do not have the control to purchase stocks at a particular price on a particular date. The plans generally buy shares for their customers on specific dates that may or may not be the best time to buy with regard to price. However, with dollar cost averaging, this becomes less important over time.

Additionally, although many of the features of direct stock purchase plans are similar to those of mutual funds, it's important to remember that buying the stock of one company can be risky. If the stock goes sour, an improperly allocated portfolio can be devastated. The prudent investor should continue to seek adequate levels of diversification, regardless of the investment strategies used.