Stock Investing: Finding Direct Purchase Program Alternatives - dummies

Stock Investing: Finding Direct Purchase Program Alternatives

By Paul Mladjenovic

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

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

Yes, buying your first share through a broker costs you a commission; however, 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 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, hence 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, for ease of transaction, often keep the stock in your account under what’s referred to as a street name. (For instance, your name may be Jane Smith, but the street name can be the broker’s firm name, such as Jones & Co., simply for administrative purposes.)

Having the stock in a street name really doesn’t mean much to you until you want to qualify for the company’s DRP. Be sure to address this point with your broker.

Getting 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 (a big negative!).

Purchasing 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: