# Direct Stock Purchase Plan (DSPP): Definition and How It Works

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## What Is a Direct Stock Purchase Plan (DSPP)?

A direct stock purchase plan (DSPP) is a program that enables individual investors to purchase a company's stock directly from that company without the intervention of a broker. Some companies that offer DSPPs make the plans directly available to retail investors, while others use transfer agents or other third-party administrators to handle these transactions. Such plans offer low fees and sometimes the ability to purchase shares at a discount.

### Key Takeaways

*   A direct stock purchase plan (DSPP) allows investors to purchase shares directly from the company.
*   DSPPs require very little money to get started.
*   Some DSPPs have no fees, but most have small fees.
*   These programs present long-term investors with a simple and automatic way to acquire shares over time.

## How a Direct Stock Purchase Plan (DSPP) Works

A DSPP allows individual investors to establish an account in which to make deposits to purchase shares directly from a given company. The investor makes a monthly deposit (usually by ACH) and the company applies that amount toward purchasing shares. Each month, the plan purchases new shares of company stock (or fractions of shares) based on the money available from deposits or [dividend](https://www.investopedia.com/terms/d/dividend.asp) payouts, if any.

This mechanism makes it easy and automatic to slowly accumulate shares from a given company. Because these plans often have very low fees (and sometimes no fees), it makes DSPPs an inexpensive way for first-time investors to enter the financial markets. The minimum deposits for participating can range from as little as $100 to $500.

Perhaps the most common means of direct investment is dividend [reinvestment](https://www.investopedia.com/terms/r/reinvestment.asp), which is the act of using one's dividends to buy more shares in the same company. For companies that pay dividends, you can set up a DSPP to purchase the shares automatically and then reinvest any income payments through an optional [dividend reinvestment plan](https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp) (DRIP).

DRIPs allow investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.

One drawback of a DSPP is that the shares are rather [illiquid](https://www.investopedia.com/terms/i/illiquid.asp)—it is difficult to re-sell one's shares without using a broker. As a result, these plans generally function best for investors with a long-term investment strategy.

## Direct Stock Purchase Plans (DSPPs) and the Issuer

As much as DSPPs can benefit investors, they also can be worthwhile to the company that offers them. DSPPs may bring in new investors who otherwise might not have been able to invest in the company. Moreover, a DSPP can allow a company to raise additional funds at a reduced cost.

Companies that offer DSPPs usually cite information about the plans on their websites, under the investor relations, shareholder services, or frequently asked questions sections. Here, you will find details about account minimums, investment minimums, any fees applicable to their offerings, trading details, etc.

The Securities and Exchange Commission (SEC) regulates a DSPP’s activity just as it does a brokerage's activities. So, although the mechanism for investing in DSPPs is slightly different from going through a broker, the risks of buying stock are equally present regardless of how the stock is purchased.

## Enrolling in a Direct Stock Purchase Plan (DSPP)

Enrolling in a DSPP typically begins with researching companies that offer these plans directly to investors. Many large, publicly traded companies provide DSPPs. Visit the company’s investor relations website to find information on their DSPP including specific eligibility requirements, fees, and minimum initial investments. You can also check with services like Computershare, Broadridge, or AST Financial, which manage DSPPs for numerous companies.

Once you’ve selected a company and confirmed the plan details, the next step is to complete the enrollment process. This usually involves filling out an application form, which can be done online or via mail, depending on the company or plan administrator.

During enrollment, you’ll provide your personal information, choose your initial investment amount, and set up a funding method, such as linking a bank account for automatic withdrawals. Many plans allow for one-time purchases or recurring investments, so you can decide how frequently you want to buy shares.

After enrolling, you’ll typically receive confirmation from the plan administrator, along with instructions on how to manage your account. As a participant, you can monitor your investments, track dividends, and make additional purchases directly through the plan.

### Note

Not all companies have DSPPs, so check with the company directly to see if they do.

## Direct Stock Purchase Plan (DSPP) Fees

You might come across several different types of fees when investing in a DSPP. Those fees could include:

*   **Initial investment fee:** An initial investment fee is a one-time charge incurred when you first enroll in a DSPP. This fee covers the administrative costs of setting up your account and processing your initial purchase of shares. Some companies may waive this fee under certain conditions, such as if you make a larger initial investment or enroll in a recurring purchase plan.
*   **Purchase fees:** Purchase fees are fees charged each time you buy shares through the DSPP. These fees are typically lower than those charged by traditional brokers for stock purchases. Purchase fees can be a flat rate per transaction or a percentage of the total amount invested.
*   **Administrative fees:** [Administrative fees](https://www.investopedia.com/terms/a/administrative-charge.asp) are ongoing costs associated with managing and maintaining the DSPP. These fees help cover the expenses related to the plan's operation, including record-keeping, customer service, and account management. Administrative fees can be charged annually, quarterly, or monthly.
*   **Selling fees:** Selling fees are incurred when you decide to sell shares purchased through the DSPP. Selling fees can be a flat rate per transaction or a percentage of the total sale amount. Again, selling fees help facilitate the administrative tasks of the sale.
*   **Transfer fees:** Transfer fees are charged when you move shares from your DSPP to another brokerage or financial institution. These fees cover the administrative costs of transferring your investments; in some cases, the transfer fee may be presented in hopes of discouraging the asset under management from being moved.

## Tax Implications of Direct Stock Purchase Plans (DSPPs)

Participating in a DSPP can have several tax implications. When you buy shares through a DSPP, you typically pay the market price at the time of purchase, or in some cases, a discounted price. The amount you pay for the shares becomes your cost basis which dictates future gains or losses when you sell the shares.

Dividends received from shares purchased through a DSPP are subject to income tax, just like dividends from shares bought through other means. These dividends must be reported on your tax return and are taxed at either ordinary income tax rates or [qualified dividend rates](https://www.investopedia.com/terms/q/qualifieddividend.asp), depending on how long you've held the shares.

Plus, if your DSPP allows for automatic reinvestment of dividends, the reinvested dividends are still treated as taxable income, and your cost basis for the additional shares purchased should be adjusted accordingly.

When you eventually sell the shares, the difference between the selling price and your adjusted cost basis is considered a capital gain or loss. If the shares have been held for more than one year, any gains are generally taxed at the long-term [capital gains rate](https://www.investopedia.com/terms/c/capital_gains_tax.asp). If the shares have been held for less than one year, any gains are generally taxed at the short-term capital gains rate (which is usually higher than the long-term rate).

## Limitations of Direct Stock Purchase Plans (DSPPs)

### Limited Modern Functionality

DSPPs were seen as a pretty sweet deal in the early days of [Internet investing](https://www.investopedia.com/financial-edge/0212/how-the-internet-has-changed-investing.aspx) because you still had to pay significant trading or management fees to [full-service brokers](https://www.investopedia.com/terms/f/fullservicebroker.asp) if you wanted to buy stock. However, as online investing has become cheaper over time, some of the original positive factors of DSPPs have faded.

For example, an often-cited advantage of DSPPs is that shareholders do not need to maintain physical certificates as proof of purchase—an agent registers DSPP transactions directly onto the company’s books. Today, however, this benefit is practically moot because most stocks are kept in electronic form in a broker's computer system, which is known as "[in street name](https://www.investopedia.com/ask/answers/185.asp)." In other words, paper certificates have well-nigh disappeared anyway.

Thus, while the concept of DSPPs may remain appealing, they are no longer quite as functional in today’s reality.

### Uncertainty About Trade Date and Stock Price

When you make a new purchase through a DSPP, regardless of whether you make a one-time purchase or sign up to invest monthly, typically you will not have any control over the respective [trade date](https://www.investopedia.com/terms/t/tradedate.asp). When you use a transfer company the transaction may not happen for a number of weeks. Basically, the purchase goes through at whatever the stock price happens to be at that time.

On the other hand, [discount](https://www.investopedia.com/terms/d/discountbroker.asp) brokers allow you to trade in real-time, so you always know the price.

### Lack of Diversification

A cardinal precept of investing is to diversify your investments. So, unless you are enrolled in dozens of DSPPs across multiple industries and internationally, or have most of your investments in index funds, mutual funds, or [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETF), you may be inadequately diversified.

Just about any individual stock purchase, whether direct or broker-transacted, runs this same risk. You need to diversify. DSPPs on their own typically will not do the trick for the average investor.

### Transaction and Investing Fees

Although a DSPP’s associated fees are low, a plan would rarely have any fees at all. Many charge initial setup fees, and some charge for each purchase transaction, as well as sales fees.

Even very small fees can add up over time, especially if you are slowly and automatically adding to your position. So, as with any investment, always read a DSPP [prospectus](https://www.investopedia.com/terms/p/prospectus.asp) carefully to see what fees you might be charged.

## What Is a Direct Stock Purchase Plan (DSPP)?

A DSPP is a program that allows investors to buy shares of a company directly from the company itself, bypassing the need for a broker. This plan often appeals to those who want to start investing in small amounts since some companies allow fractional share purchases. 

## How Do I Buy Shares in a Company Directly?

Through a DSPP, you can buy shares of a company directly from the company itself (i.e. you do not need to work with a third-party broker or work with an exchange).

## What Are the Benefits of Investing Through a DSPP?

Investing through a DSPP offers several benefits, including lower transaction costs, the ability to purchase fractional shares, and the convenience of automatic investments. Investors can accumulate shares over time, even with small, regular contributions.

## How Do I Enroll in a DSPP?

To enroll in a DSPP, you typically need to visit the company’s investor relations website or contact their transfer agent. The enrollment process often involves completing an application form and making an initial purchase, which could be as low as $25 or $50, depending on the company.

## How Are Dividends Reinvested in a DSPP?

In a DSPP, dividends can be automatically reinvested to purchase additional shares of the company’s stock. This process is often referred to as a dividend reinvestment plan (DRIP) within the DSPP.

## The Bottom Line

Direct stock purchase plans allow investors to buy shares directly from a company, often with low fees and without a broker. They are ideal for long-term investors looking to build wealth gradually through regular contributions, dividend reinvestment, and fractional share purchases.