In a perfect world, money would grow on trees, there would be a pot of gold at the end of every rainbow, and we could all live on love, alone. Unfortunately, utopias like these exist only in our dreams or lavish Hollywood productions. In reality, life is expensive, money must be earned, and love does not pay the bills.
The money tree sapling produces a modest yield of coins.
You can, however, put your hard-earned cash to work for you, creating a slice of paradise for yourself. It’s all about investing your coins wisely. And a Direct Stock Purchase Plan may be a viable option.
What is a Direct Stock Purchase Plan?
A Direct Stock Purchase Plan, otherwise known as the DSPP, is a plan in which a publicly-traded company permits an individual to purchase a stock directly from them without a broker.
What are the benefits of a Direct Stock Purchase Plan?
The Direct Stock Purchase Plan offers investors several sound reasons for choosing it as an investment option.
Inexpensive. By eschewing brokers and their expensive commissions, you will have more to invest. The DSPP is also a doable alternative to other stock purchases as you can usually purchase a very small number of shares and invest modest amounts of money.
Great for Beginners. The DSPP is especially suitable to young people who cannot afford sizeable investments and, instead, need a vehicle through which they can build up their portfolio slowly in small increments.
Flexible. Most DSPPs enable the purchaser to invest money in the stock whenever they can. Some even allow you to opt for continuous weekly or monthly installments. You can even select to have your dividends rolled over into your investments as opposed to taking the cash. This will better enable you to grow your investment more quickly.
Based on “Averages.” With traditional brokerage investments, you must endure the stress of monitoring your stocks for highs and lows. Thanks to the Direct Stock Purchase Plan’s reliance on dollar cost averaging, you can avoid some of the pain associated with selling or buying at the wrong time.
Accessible. By opting for a DSPP, you are able to make investments in some of the globe’s biggest companies without forking over a massive chunk of change. And, unlike the Employee Stock Option Plan, the Direct Stock Purchase Plan is available to everyone.
As the sapling grows into a small tree, it will begin to produce bills of small denominations.
What are some of the risks associated with a Direct Stock Purchase Plan?
There is no such thing as a “sure thing.” If there was, we would be tripping over millionaires. The truth is that all investments involve some degree of risk. And the Direct Stock Purchase Plan is no exception.
Lack of Control. If you want to have some control over when your shares are purchased and sold, this is not the right choice for you. As “How to Buy a Stock Without a Stockbroker” warns, your purchase may not go through for weeks, meaning that you won’t know the share prices until after you have paid for them. It can be particularly risky if you are investing in a volatile market or company.
Short-term Pain. Due to the inherent lack of control over the purchase and selling prices of your shares, you may absorb short-term financial hits. “Direct Stock Purchase Plans Explained” warns that if you’re closing in on retirement fast, a direct stock purchase plan might hold too many uncertainties and have too many risks.” As a result, the DSPP is not a wise move for anyone looking to create a nest-egg quickly. It is better used for long-term investing.
What should I keep in mind when deciding on a DSPP?
It is important to make yourself aware of a few facts before deciding if a DSPP is for you or choosing which one is the best option.
Requirements. Some Direct Stock Purchase Plans stipulate that purchasers meet certain requirements in order to qualify to make a purchase. Some require that you are an existing shareholder before participating in a DSPP. Others may have a minimum deposit, while some may insist that you are a company employee. Be sure to check into these requirements before pursuing a DSPP with any company.
Longevity. As previously stated, Direct Stock Purchase Plans are really designed for the long-term investor. Before selecting a company, be sure to check them out and ask yourself if this is a business that you would like to invest in for the long haul.
Flexibility. Some DSPPs will enable you to make regular investments on a weekly or monthly basis through an automatic withdrawal from your bank account. If this is something that appeals to you, you may want to hunt down a company that offers this type of arrangement.
The full-grown money tree will produce a sizeable crop of domestic currency.
Until someone cultivates a money maple, locates the end of a rainbow, or comes up with a goose that can lay a golden egg, you will be required to continue earning that paycheck. You can, however, invest it wisely and make it grow. A Direct Stock Purchase Plan may help to transform your savings into a promising future and worry-free retirement.
If you’d like to learn more about stock purchasing options, you may want to learn about DRIPs in “Dividend Investing–Cashing in on Company Earnings.”
Kimberley Laws is a freelance writer and avid blogger. You can follow her at The Embiggens Project.