Plans are made directly available to retail investors by some companies that offer DSPPs, whereas others use third-party administrators or transfer agents in order to handle these transactions. Low fees and sometimes the ability to purchase shares at a discount are offered by such plans. DSPPs are not offered by all companies, also there could be certain restrictions about when an individual may purchase shares in such plans. As the investing through online brokers has become more convenient and less expensive over the last two decades, the appeal DSPPs once had is somewhat lost, but still DSPPs offer an advantage for the long-term investors who don’t have a lot of money to get started.
In order to make deposits for the purpose of purchasing shares directly from a given company, a DSPP allows individual investors to establish an account. Usually by ACH, the investor makes a monthly deposit and the company applies that amount towards purchasing shares. New shares or fractions of shares are purchased each moth by the plan, based in the money that is available from the dividend pay-outs or the deposits, if there are any. To slowly accumulate shares from a given company, this mechanism makes it automatic and easy. For first-time investors, it makes DSPPs an inexpensive way to enter the financial markets since these plans often have a very low fees, and sometimes no fees at all. For participating, the minimum deposit can range anywhere from 100 dollars to 500 dollars.
The act of using one’s dividends in order to buy more shares in the same company is known as dividend reinvestment, and it perhaps is the most common means of direct investment. In order to purchase the shares automatically and then reinvest any income payments through optional dividend reinvestment plan (DRIP), you can set up a DSPP for companies that pay dividends. Reinvesting their cash dividends into fractional shares or additional shares of the underlying stock on the dividend payment date is allowed to the investors by DRIPs.
The shares being rather illiquid is one of the drawbacks of a DSPP. Illiquid meaning that it is difficult to re-sell one’s shares without using a broker. As a result, for investors with a long-term investment strategy, these plans generally function the best.
We already know that DSPPs can be very beneficial to investors, but they actually also be worthwhile to the company that offers them. New investors who otherwise may not have been able to invest in the company might be brought in be the DSPPs. Moreover, the ability to raise additional funds at a reduced costs can also be provided to a company by DSPP.
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