Investing through Direct Stock Purchase Plans (DSPPs)
Understand the benefits. DSPPs allow you to take advantage of Dollar-Cost Averaging (DCA), which is the strategy of investing with a fixed dollar amount each month regardless of the stock price. Some months the stock price will be high, and others it will be low. However, over time, the average stock price will go down. This reduces the risk of investing a large amount of money at the wrong time. You are using the same strategy if you are investing in a 401(k) or a 403(b). With DCA, the dollar amount remains the same each month, but the number of shares purchased varies because of fluctuations in the price. This strategy allows investors to ignore the short-term market and invest in companies over the long-term. It works because the market historically has shown strong returns over the long-term.
Understand the drawbacks. Although DSPPs are a wise investment for many beginning investors or those with a small amount to invest, you should also be aware of their shortcomings. Your investments may be inadequately diversified. Also, the fees can become expensive. In addition, the record-keeping is daunting. Finally, you have no choice over the purchase date of your stocks. Lack of diversity is a drawback of DSPPs. Unless you invest in a number of different companies across a variety of industries, your investments will not have adequate diversity. The fees, although low, can add up over time. Many companies charge initial setup fees, purchase transaction fees, sales fees and more. Investors must keep track of the cost of stock purchases in order to calculate capital gains taxes due. Those with multiple DSPPs over many years have to keep track of a multitude of transactions for each year. You have no control over the trading date and price. Some stock purchases may take weeks.
Know how DSPPs work. If you have a small amount of money to invest, and you don’t want the returns to be wiped away by expensive brokerage fees, then consider a DSPP. DSPPs allow you to purchase shares of stock directly from a company with the help of a transfer agent. You don’t need a broker to be the middleman. DSPPs are also known as no-load stocks. DSPPs are generally available from large, well-established companies. You can agree to automatic monthly withdrawals from your checking or savings account to purchase more stocks. A transfer agent is a third party that represents the company. It may be a bank, a trust company or a similar organization. Corporations hire transfer agents to maintain records of stock transactions and investors’ account balances, to cancel and issue certificates and to deal with any problems, such as lost or stolen certificates. Some companies choose to act as their own transfer agent, but most use a third party.
Identify a company with which to invest. Large, publicly-traded corporations often have DSPP programs. Consult informative websites such as Computershare. These websites have databases of thousands of companies that can be searched by industry and location. They also provide information about investments strategies. Do a quick search to get a complete alphabetical list of companies that offer DSPPs. Or do an advanced search to filter companies by industry or initial investment amount. See the minimum share purchase and the minimum purchase dollar amount. Click on the Plan summary link to view more information such as plan fees and features.
Register and invest with a company. Go to the investor’s page of the company’s website. Look through the FAQs to find a link to information about DSPPs. This link will take you to the company’s transfer agent. On the transfer company’s website, find information about the DSPP for the company in which you are interested. This will tell you about any associated fees, the minimum required to open the account and the minimum monthly investment. Supply information such as your name, address, social security number, bank account information and monthly withdrawal amount. Indicate whether you want the dividends to be sent to you monthly or reinvested into additional stock. You don’t have to set up a monthly withdrawal to purchase additional stocks. It is possible to make a single, one-time investment of a fixed number of shares. Reinvesting your dividends to purchase additional stock is known as a Dividend Reinvestment Plan.
Investing through Dividend Reinvestment Plans (DRIPs)
Understand the meaning of a DRIP. Once you own shares of stock in a company, you have two choices. You can have the monthly dividends sent directly to you or you can choose to reinvest them to purchase additional stock. The latter option is known as a Dividend Reinvestment Plan, or DRIP. Many companies that offer DSPPs also offer DRIPs. However, if you do not want to purchase stock through a DSPP, you can purchase one share of stock in a company with a company such as Frame a Stock.
Understand the benefits. Enrolling in a DRIP is usually simple and involves few or no commission fees. Once you are enrolled, the process is entirely automated, so you don’t have to worry about monitoring it. DRIPs also allow you to purchase fractional shares, which is purchasing less than one full share at a time. Over time, purchasing fractional shares is lucrative because instead of holding on to cash while it builds up, it is invested right away. DRIPs also enjoy the benefits of dollar cost averaging. Over time, the investor pays an average cost for shares of the stock.
Understand the downside. The drawbacks of DRIPs are similar to those of DSPPs. Depending on the company with which you are investing, the fees can become expensive. Also, investors must think about ways to diversify their portfolio, which is difficult with DRIPs. Although dollar cost averaging and purchasing fractional shares are beneficial to investors, DRIPs do not allow the investor any control over the purchase date of the shares. Finally, record-keeping for tax purposes can be cumbersome.
Choose a dividend reinvestment option. Choose between the partial or full enrollment plans. With a partial enrollment plan, a portion of the dividends are paid to you. The rest is reinvested back into the company. With the full enrollment plan, the entire monthly dividend is used to purchase additional shares. If the monthly dividends are not sufficient to purchase shares in the company, they are allowed to accrue until additional shares can be purchased.
Using an Online Brokerage Account
Understand the difference between an online brokerage account and a full-service broker. Full service brokers offer a variety of services and investment products. But they can be expensive. Discount and online brokers charge small commissions, but they do not offer investment advice. Full service brokers, such as Merrill Lynch, Salomon Smith Barney, Morgan Stanley and Dean Witter, offer personal advice, retirement planning, tax tips and a wide selection of investment products; however, they charge usually charge hefty fees for personal advice. Also, brokers earn commissions based on how much you trade, not the performance of your stock. This can encourage them to advise you to purchase when it’s not necessarily beneficial to you. Discount online brokers, such as TD Ameritrade and E-Trade, are a good option for self-directed investors who want to do their own research and not rely on the advice of a broker. The commissions are low and investors generally have control over their accounts.
Select the online broker. The quality of support varies from company to company. Some charge fees for talking to a live person. Study the company’s website to learn information about the support they provide. Call them with questions to evaluate how well they treat people. Select a company that offers a level of support with which you feel comfortable. Important questions to ask include whether they are offering any special promotions, how much the minimum balance is for brokerage accounts, what fees they charge and what types of education and research tools they offer. Recognize that online brokers may not offer much in the way of research and education about where to invest because they are geared for investors who feel comfortable doing that research on their own. However, choose a site that offers a level of technical support with which you feel comfortable.
Open a brokerage account. Go to the company’s website. Find the “Open an Account” link. Follow the instructions for opening an account. You will need to provide key information, such as your name, address, e-mail address and social security information. The websites make it easy to open an account because it’s in their best interest to do so.
Identify your risk tolerance. Risk tolerance is the degree to which you are able to withstand large swings in the market. Understanding yours will help you choose the right investment tools for you. Assess your degree of risk tolerance with a risk tolerance questionnaire, which are available online (such as the one found here or through your online brokerage. Other considerations in risk tolerance are the amount of time you have to invest, psychological comfort with the potential of loss, your future earning capacity, and the value of your other assets. If you have many years to let your investments grow, then you may be able to withstand a few bad years of losing money on investments. Also, if your other assets are highly valuable, then you may feel more comfortable with high-risk investments.
Select your account type. Choose either a cash or margin account. Each has different degrees of risk, so choose the one that suits your risk tolerance. With cash accounts, you must pay the amount due on any transaction in full by the settlement date. You fully own all money and securities in a cash account. With a margin account, you can borrow money from the broker to fund more investments. You must sign a hypothecate agreement, which pledges securities as collateral for the loan, and pay interest on the money borrowed.
Fund your account. You will initially have anywhere from 10 to 14 days to fund your account. Choose from a variety of different ways to transfer money into the account. You can write a check and mail it in. Or, you can make a deposit from your checking or savings account through an electronic transfer. You may also be able to make a transfer from an external brokerage. Another option is to contact your bank to make a wire transfer. Finally, you can make a deposit of a physical stock certificate into your account.
Make your first trade. Find the trading platform. This is the webpage where you can select the details of your trade. You can typically find this under the “Trade” or “Trading” tab of the website. Choose the order type. This means select “buy” or “sell.” Select the desired amount of shares you wish to buy or sell. Plug your company’s stock symbol (if you don't know it, you can search here). You will then be given information about your company’s current trading conditions, such as the current price of the stock and how it has performed that day. Choose the price type for executing your trade: market, market on close, or limit. Select “market” to execute the trade at the current market price. Select “market on close” to execute the trade as close to the end of the trading day as possible. Note that a market order or market on close are guaranteed execution, but price is variable. Select “limit” to enter a specific price for the trade. If the stock never reaches this price, your trade will not be executed. Note that limit order guarantees price equal to limit or better, but not execution Enter the term of your trade. This specifies the length of time your trading order remains in effect. Your choices usually include “good for the day,” “good for 60 days,” or “good until canceled.” Click on the “help” or “?” icons if you have questions. Click the “preview order” button to review all of the options you just selected. This is your last opportunity to to make any changes. If it looks acceptable, click the “execute trade” button.
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