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The absolute
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What is the difference between a Direct Purchase Plan (DPP) and a Dividend Reinvestment Plan (DRIP)? Both are no-load stocks and in both cases the individual investor can buy stock directly from the company without going through a broker. However, to buy a DRIP, you need to already own stock to reinvest your dividend as more stock. With a DPP, you can be a first-time buyer. Of course most companies with a DPP also offer a DRIP. (Though there are some companies with a DRIP who do not yet have a DPP.) There are over 2,000 companies offering one type or another of direct purchase plan.
And what is this new type of financial industry which has sprung up, the "Folio Service"? Some folio services offer the opportunity to reinvest dividends even if a company does not directly offer a DRIP - and the folio service enables you to invest in a fraction of a stock, as does a DRIP.
At one time, DPPs were offered mainly by public utilities. This changed in the '90's when a new SEC ruling made it easier for companies to sell stock directly to the public. Public companies are, at least in part, motivated to create DPPs to offset the increasing number of stocks being held in "street name" rather than by registered holders.
You now also see more mention of Direct Public Offerings (DPOs). Until recently, offering IPO stock directly to the public worked best for local companies who enjoy good word-of-mouth publicity in the community. With the growth of the Internet of course, however, the community has expanded.
Of course these plans are popular with investors wishing to avoid brokers' fees. However, David Halseth, of Halseth Capital Management, cautions, "Don't let the tail wag the dog by deciding to buy stock based on whether or not the company offers direct purchase. You should buy based on your investment strategy and research. But if you were going to buy the stock anyway, of course purchase directly from the company."
If you are looking at direct purchases simply to avoid broker fees, be aware that some direct plans do, themselves, charge administrative fees for transactions. You need to study each individual plan. If you look at our list of direct stock purchase plans, your best bet is to click on the stock symbol to get plan information from NetStock Direct, which summarizes the various features in an organized manner.
Some companies administer the sale of stock directly through their corporate offices, while others make use of a plan run through a bank, such as EquiServe (formerly First Chicago Trust Company), which may, or may not, also function as transfer agent. Yet others are initially offering the stock through the easier-to-set-up bank-run plan with an eye to eventually administering the plan themselves. The type of plan being offered determines what type of advertising, if any, the company is allowed to engage in to make the public aware of the DPP.
Moreover, DirectINVESTOR points out,
"Eligibility criteria, investment program procedures and program features may vary substantially from program to program.... Several companies offer initial purchase services only to residents of the state in which the company operates, to customers, or may exclude residents of certain states. ...[The DirectINVESTOR List]... does not constitute an offer to sell or a solicitation of an offer to buy any security of any company included on the list. Such offers and solicitations can only be made in strict compliance with applicable federal and state securities laws. Investors should always obtain and carefully study the program prospectus or service brochure before making any investment decision.
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Here is a copy of the Security Transfer Association's summary of key aspects of state securities laws in respect to implementing a DPP.
During the 21st century we have seen the stunning development of an entirely new kind of financial instrument and a new financial industry, the "Folio Service". These are a cross between a mutual fund and an online brokerage account with aspects of a DRIP. Read the article "Build A Portfolio On The Cheap" from the Philadelphia Inquirer. Since the site has reorganized and it has disappeared, here's a text-only version in which the links probably no longer work. Some companies offering variations of this new product are listed below. Some of these new program offer you dollar-based investing. Dollar-based investing lets you buy shares of stock in dollar amounts. This allows you to: invest according to your budget by purchasing partial shares; invest a fixed dollar amount regularly in blue-chip companies for the long term; reinvest dividends in any or all. Of course we have a personal preference for Sharebuilder.com, with whom WSC has an affiliate relationship. Wells Fargo also chose Sharebuilder to be their dollar-cost-averaging investment vehicle.
Each service works slightly differently. Here we give you details of one, our affiliate "ShareBuilder.com".
ShareBuilder offers customers, who want to save for retirement, college or future life plans, a selection of account types: individual, joint, custodial, Coverdell (ESA), traditional and rollover IRA, Roth and Conversion IRA. ShareBuilder provides customers with a myriad of valuable features and benefits for building an automatic investment plan for the long-term including Dollar-Based Investing, the ability to purchase fractions of shares in their preferred securities in dollar-based amounts, making it easier to get into high-priced securities and Dollar-Cost Averaging which allows customers to purchase a set amount of securities on a regular basis (i.e. weekly or monthly) over a set period of time.
Here's how it works. Each week or month (you decide), ShareBuilder automatically buys the stocks you designate in the dollar amount you specify. You invest regularly through recurring investments. With ShareBuilder you can buy partial shares of stocks and steadily accumulate positions over time. Each week ShareBuilder collects the orders their investors have made through their ShareBuilder Plan and purchases the shares in a lump sum. Since you choose the dollar amount to invest, rather than the number of shares to buy, you will usually be purchasing partial shares. For example, if you invest $100 in a stock that ShareBuilder acquires for you at $75, you will own 1.33 shares of that stock. ShareBuilder buys these stocks at the current market prices available at that time. After each transaction, they notify you and let you know the number of shares you've purchased.
Some of the product benefits are: (1) Automatic Investing: set-up automatic deductions from their designated checking and/or saving account or payroll. (2) Extensive Selection: an extensive selection of more than 4,000 stocks, close-ended bond and exchanged-traded funds. (3) Real-time Information: the convenience of reviewing portfolios, account statements and confirmations online. (4) Investor Education: valuable and practical investor education, including relevant articles, graphs and charts, etc. (5) PlanBuilder: a free portfolio diversification tool, which helps you build a portfolio tailored to your personal investing profile.
ShareBuilder offers customers some of the lowest transaction fees in the brokerage industry. It is only $4 or less per transaction, depending on investing program selected. There are no account or investment minimums; no inactivity fees.
The company's technology team designed and built investing platform functionalities, such as reoccurring customer transactions, dollar-based transactions and a customer order aggregation process. The company uses a variety of modern technologies and techniques that provide multiple layers of protection against network or physical intrusion and compromise.
There are about 1,500 companies offering plans in the US. On our WSC list we have about 670 companies that we feel may be worth study and who have good financial coverage. We have simply confined this list to those companies that the AAII has decided to cover for its members. For the complete list go to NetStock Direct. ShareBuilder's list contains many additional companies. Although this includes some who also offer direct plans via the company, we are making an educated guess that between them NetStock Direct and ShareBuilder cover about 4,000 stocks.
GO HERE TO THE WSC LIST
GO HERE TO NETSTOCK DIRECT
GO HERE TO SHAREBUILDER.COM
When you go to a company's investor relations page, you may find no information specifically on the DPP! This is not an oversight on the part of the company. As mentioned above, federal regulations have prohibited DPPs from blowing their own horn.
There are several sites through which you can get more information and order information on Direct Purchase Plans.
The Securities Transfer Association also publishes their list. They link to company data at Reuters MoneyNet and they note which companies offer information about the plan online. As the SEC becomes more lenient in what they allow companies to say about their plans, we hope to see more DPP information at company websites.
Other web pages giving information on Direct Purchase Plans are:
There are now an exploding number companies specializing in DPOs on the web. Go to the WSC page specializing in IPOs to see them.
If you are considering investing in a DPO, one of the important questions to ask is "Where will the stock be traded after the company is public?"
If the stock will be listed on any of the major exchanges, or even on a market system accepting smaller stocks, then it can probably be traded relatively easily. However, if it does not qualify for any exchange or market system, you may be in trouble if you ever want to sell the stock. There are new developments in direct trading which we summarize on our Cyber Exchanges Page, however many of these are very new and experimental.
