A direct stock purchase plan is a method that allows individuals to purchase shares of stock without using a brokerage firm. When purchased through a brokerage firm, the investor pays a commission based on the purchase price of the stock. When stock is purchased through a direct stock purchase plan, this commission is not required. Many new investors choose a direct stock purchase plan, or DSP, to save money.
Not all companies offer DSP plans. In the 1990s, the SEC loosened regulations that were in place for the sale of stock. Loosening of restrictions on this SEC-regulated activity allowed more companies to offer stock to the general public. Companies often prefer that their stock be held by named investors rather than in bulk by companies. By offering a direct stock purchase plan, a company is more attractive to the individual investor.
The number of companies that offer direct stock purchase plans have increased greatly in recent years, but not all companies offer DSP plans. Companies that do offer the direct purchase of shares of stock sometimes have restrictions. Some companies only offer direct stock purchase to their employees, and others only offer dividend reinvestment plans. In dividend reinvestment plans, the initial stock is purchased through a brokerage firm, but the dividends, rather than being paid, are used to purchase additional stock.
Individuals that are interested in purchasing stock through a direct stock purchase plan should expect to work either directly through the company's corporate office or through what is known as a transfer agent. A transfer agent, which is often a bank or a trust company, handles a variety of duties for the company. They issue and cancel stock certificates as sales are made, deal with stock certificates that the investor loses or has stolen, and have the responsibility of paying out dividends. The transfer agent can also register the stocks for the purchaser. This eliminates the need for the investor to physically hold the stock certificates.
When a company uses a transfer agent to handle the issuance of stock certificates, there is often a separate fee for the service when you purchase shares of stock. This fee, however, is for service, not commissioned based, and is not as high as the commission based fees of a brokerage firm.
Purchasing stock through a direct stock purchase plan allows investment dollars to stretch further. For individuals that plan to do their own research on what stocks to purchase, a DSP is a money saving alternative to brokerage firms. For the investor who wants guidance when making investments, a traditional brokerage relationship makes sense.