how dpps works
With DPPs, you no longer need to go through brokers to purchase your favorite stocks. Instead, you're dealing directly with the company and your shares are on the books of the company.DPPs grew out of Dividend Reinvestment Plans (DRIP), which let shareholders purchase additional shares with their dividend payments instead of taking the dividends in cash. The difference between DPP and DRIP is that to buy DRIP, you need to already own stock to reinvest your dividend as more stock. With a DPP, you can be a first-time buyer.
Direct purchase plans make it as easy to buy stocks as you're likely to find. Currently, there are over fifteen hundred companies offering plans in the US, of which over six hundred offer DPPs.
All you need to do is set up an account with a participating company and send a check or a series of post-dated checks. You can also sell your shares through the plan. For a detailed list of the companies offering DPPs, visit Netstockdirect.com
hush hush
Keep in mind that if you go to the company's investor relations page, you may find no information on their DPPs. This is not an oversight on the part of the company.If you're wondering why you've never heard of buying stock directly from a company before, well the reason is simple: the companies operating DPPs are not permitted, under mandate from the Securities and Exchange Commission, to advertise the programs aggressively. Hmm, perhaps it's because they don't make money on them.
Because Federal regulations have prohibited DPPs from tooting their own horn, you have to ask the company's investor relations department to provide more information regarding their DPP.
the obvious appeal
The obvious appeal of a direct purchase plan is the low fees. If a company is selling you shares from its treasury, then there may be no fees at all. If the company has an investment dealer go into the market to buy the shares, then you'll pay a small commission.But DPPs have a more important benefit than low fees: the ability to buy fractional shares. This means you can build a position in a company with small amounts of money invested whenever -- either sporadically or on a regular basis.
Another advantage gained through direct purchasing plans is that you can buy stock with monthly deductions from your bank account. This allows an investor to practice a dollar cost averaging strategy while purchasing the particular stock.
what's the catch?
Does this sound too good to be true? You might want to know what's in it for the company. Plenty. For one thing, DPPs attract individual investors who otherwise might not buy stock.Direct purchase plans are particularly appealing to consumer-oriented corporations: utilities. They create a kind of brand loyalty. From a company's point of view, an owner/customer is going to be a more loyal customer.
DPPs also help companies raise capital at a low cost, and allow them to offset the influence of institutional shareholders by bringing in more retail shareholders.
notable drawbacks
Despite their appeal for the small investor, direct purchase plans are only mildly popular in the United States. This is widely explained by a few notable drawbacks.If you are looking at direct purchases simply to avoid broker fees, be aware that some direct plans do charge administrative fees for transactions. You need to look at each individual plan to see if it charges any administrative fees and if so, how much.
Another problem with buying stocks through a DPP is timing. Investors can't time the purchase of their shares to take advantage of price dips or to avoid upward surges. This could easily wipe out the cost difference from the lower commission.
DPPs also create big tax headaches when you've sold your position and have to figure out what your buying costs were. There's also the major inconvenience of each DPP stock having its own account and statement, as opposed to having everything grouped together at an investment dealer.
Now that you've been enlightened about direct investing, it's up to you to take advantage of it. Happy investing.
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