Direct Purchase Programs as an Alternative Stock Investment Method - dummies

Direct Purchase Programs as an Alternative Stock Investment Method

By Paul Mladjenovic

If you’re going to buy a stock anyway, why not buy it directly from the company and bypass the broker (and commissions) altogether? Several hundred companies now offer direct purchase programs (DPPs), also called direct investment programs (DIPS).

Advantages of direct purchase programs

DPPs give investors the opportunity to buy stock with little upfront money (usually enough to cover the purchase of one share) and usually no commissions. Why do companies give investors this opportunity? They want to encourage more attention and participation from investors. For your purposes, a DPP gives you what you may need most: a low-cost entry into that particular company’s dividend reinvestment plan, or DRP.

Disadvantages of direct purchase programs

As beneficial as DPPs are, they do have some minor drawbacks. Keep the following points in mind when considering DPPs as part of your stock portfolio:

  • Although more and more companies are starting to offer DPPs, relatively few (approximately 500) companies have them.

  • Some DPPs require a high initial amount to invest (as much as $250 or more) or a commitment of monthly investments. Ask the plan administrator about the investing requirements.

  • A growing number of DPPs have some type of service charge. This charge is usually very modest and lower than typical brokerage commissions. Ask about all the incidents that may trigger a service charge.

Alternatives to direct purchase programs

Although several hundred companies offer DPPs, the majority of companies don’t. What if you want to invest in a company directly and it doesn’t have a DPP?

Buy your first share through a broker to qualify for a DRP

After you make the purchase, you can contact that company’s shareholder services department and ask about its DRP. After you’re an existing stockholder, qualifying for the DRP is a piece of cake.

To qualify for the DRP, you must be on the book of record with the transfer agent. A book of record is simply the database the company uses to track every single outstanding share of stock and the stock’s owner. The transfer agent is the person or organization responsible for maintaining the database.

Whenever stock is bought or sold, the transfer agent must implement the change and update the records. In many cases, you must have the broker issue a stock certificate in your name after you own the stock. Getting a stock certificate is the most common way to get your name on the book of record, qualifying you for the DRP.

Sometimes, simply buying the stock isn’t enough to get your name on the book of record. Although you technically and legally own the stock, brokers often keep the stock in your account under what’s referred to as a street name. Having the stock in a street name really doesn’t mean much to you until you want to qualify for the company’s DRP. Address this point with your broker.

Get started in a DRP directly through a broker

These days, more brokers offer the features of the DRP (like compounding interest) right in the brokerage account itself, which is more convenient than going to the trouble of setting up a DRP with the company directly. This service is most likely a response to the growing number of long-term investors who have fled traditional brokerage accounts for the benefits of direct investing that DPPs and DRPs offer.

The main drawback of a broker-run DRP is that it doesn’t usually allow you to make stock purchases through optional cash payments without commission charges.

Purchase shares via alternate buying services

Organizations have set up services to help small investors buy stock in small quantities. The primary drawback to these middlemen is that you’ll probably pay more in transaction costs than you would if you approached the companies directly. Check out the most prominent services, which include the following: