|Investors > Direct Purchase Plans|
Did you know that you can buy stock directly from public companies without going through a broker and paying any excessive brokerage fees? In this section, you will learn about the two ways public companies allow you to buy their stock directly from them: through Dividend Reinvestments Plans (also known as DRIPS) and Direct Stock Plans and. Even though many people refer to both plans as DRIPS, there are minor differences between the two and you can use both of them to get the most out of your investment dollar. We refer to both plans as Direct Purchase Plans.
Why Companies Offer Direct Purhase Plans
Advantages of Direct Purchase Plans
Teenvestors Can Afford It. Direct Purchase Plans allow Teenvestors to get into the stock market cheaply. Many companies with Direct Stock Plans and DRIPs allow you to make additional share purchases (full or fractional shares) with as little as $10 once you join their plans. After opening the account, you can invest as little or as much as you want. In fact, you can buy fractions of a share of stock if you don’t have enough money to buy a full share (after you have met the company’s initial purchase requirement).
Fees Are Low. Compared to the typical broker, the fees for investing in Direct Stock Plans and DRIPs are very low. There is usually a one-time initial set-up fee of $5 to $15 for an account. Some of these plans charge as little as 3 cents to 15 cents in fees for each purchase of stock, while others charge $2 and up.
The Plans Allow Dividend Reinvestments. Stocks pay dividends every 3 months. Instead of pocketing that money, you can have the plan reinvest it in the company’s stock. If you know anything about the power of compounding, you know that reinvested money can earn you higher returns on a compounded basis.
Disadvantages of Direct Purchase Plans
Record Keeping Is Critical. You must keep good records of all your purchase, including dividend payments made to your account even if you reinvest those dividends.
Timing Of Purchase & Salse. You can only buy or sell shares for your Direct Stock Plans and DRIPs on specific dates that are determined by the companies offering these plans. For example, some companies may only buy or sell stocks for you once a week, while others may buy or sell stocks for you once a month or even once every 3 months. This means that if stock prices are moving around a lot, you can never tell the price at which you will end up buying or selling the stock. This shouldn’t really be a big problem for most Teenvestors if they are investing, as we recommend, in big, stable, large-cap companies whose stock prices don’t fluctuate as much.
Minimum Initial Investment Amounts Can Be High. Even though there are lots of companies that require initial investments of only $100 to $250, there are some companies that require much higher initial investments. For example, McDonald’s has an investment minimum of $500. You should be aware, however, that after the initial investment amount, you can make subsequent investments that are as small as $10.