Direct Stock Purchase Plans
A lot of companies let investors buy stock directly from them. This can be done through the company's direct stock purchase plan or through a dividend reinvestment plan through which investors can reinvest automatically their cash dividends from the company into more shares.
In this article you will learn more about these two types of plans.
Direct Stock Purchase Plan
Through a direct stock purchase plan investors can buy stock directly from the issuing company without the need to use or pay commissions to a broker. However, there may be some specific requirement, such as:
- Investors may be charged a fee for using the direct plan's services.
- There may be a requirement that you are the company's employee in order participate in their direct stock plan.
- Some companies provide only their employees with the opportunity to participate in their direct stock purchase plans. Think over this opportunity well since it is not always a good idea to increase your holdings (and your dependence) in your employer's company.
- Investors will usually not be allowed to buy or sell securities at a specific time or at a specific market price. Instead, companies usually buy or sell shares for the direct stock plan at predetermined time (daily, weekly or monthly) and at the average market price.
Depending on the plan and the company, investors may not have to pay for an entire share to buy stock but instead invest a certain dollar amount. In such cases they can have their checking account debited regularly in order to invest in the plan.
Some plans let investors have their shares transferred to their broker for selling but it may be required to pay a fee for this purpose.
Dividend Reinvestment Plan
Dividend reinvestment plans present great opportunities to take advantage of power of compounding. Through these plans investors may reinvest the dividends they receive from the company in order to purchase more of its stock. As with the direct stock purchase plans, investors often don't have to pay commissions when they use dividend reinvestment plans.
If you want your dividends to go automatically and directly toward buying more stock you must first sign an agreement with the company.
Direct stock plans are often a great way to minimize your costs. However, always read the company's disclosure information to get familiar with the particular plan and learn how to enroll, how many shares are needed to open an account, what fees apply, and etc.
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