Key Takeaways
- Direct stock purchase plans allow investors to buy stock directly from companies, often with lower fees than using a broker.
- Dividend reinvestment plans (DRIPs) let investors automatically reinvest dividends to purchase more company stock, usually commission-free.
- Employee stock purchase plans (ESPPs) offer employees the chance to buy their company’s stock at a discount, often 85% of market value.
- Buying company stock directly can be cost-effective for small investors aiming to minimize transaction costs.
- Consider the risks of concentrating investments in a single company when participating in ESPPs.
Buying stock directly from a company can be done through specific programs like direct stock purchase plans, dividend reinvestment plans (commonly known as DRIPs), and employee stock purchase plans (ESPPs). These approaches allow investors to acquire shares without a broker, often at lower costs.
We’ll break down these plans in detail to help you understand how you can invest directly in the company of your choice.
Understanding Direct Stock Purchase Plans
This is when a person buys stock directly from the issuing company. Several well-known companies will sell stock directly to individual investors. Most companies that offer this kind of purchase option don’t charge investors a commission, and if they do, the commission or service charge is very low compared to buying stocks through a broker. If you’re buying a very small number of shares and want to minimize your costs, a direct stock purchase is a great way to go.
Exploring Dividend Reinvestment Plans (DRIPs)
Investors who own shares in a company with a dividend reinvestment plan have the option of registering with the company and participating in the plan. Instead of receiving dividends from the company, DRIP participants’ dividends go directly toward buying more stock in the company. As with direct stock purchases, there are often no commission charges associated with DRIPs.
Here is how a DRIP works:
Example
Company A pays a dividend of $0.50 per share on an annual basis, and its stock is worth $40 per share. A DRIP participating investor owns 200 shares of Company A’s stock. Instead of receiving a $100 check each year in dividends, the investor can buy 2.5 shares ($100/$40 per share) of stock. These shares are given directly from the company, and no commission fees are charged.
Insights Into Employee Stock Purchase Plans (ESPPs)
For employees that work for public companies, ESPPs provide a great chance to buy the company’s stock at a discount. Employees are limited in the number of shares they can buy, and it’s not always a good thing to increase your holdings in your employer’s company – it’s a bit like putting all of your eggs into one basket.
In general, ESPPs offer employees the chance to buy stock for 85% of the market value. These stocks can go directly into a retirement fund, so there’s usually an opportunity to participate in ESPPs with untaxed income; in these cases, money is deducted from an employee’s salary.