Beginning Investors: Consider Direct Stock Purchase Plans

Many beginning dividend investors are curious to know how they can get started with a relatively small amount of capital. After all, many beginning investors don’t have a huge amount of cash to tie up in stocks. Most beginning investors have smaller amounts of money, and are more likely to be interested in dollar cost averaging. One way that you can get started with dividend investing is to see if your stock of choice comes with a direct purchase plan.

Direct Stock Purchase Plans

Online discount brokers have offered great opportunities for ordinary people to easily – and affordably – invest. You can do a lot with online brokers. However, you still might be paying more in fees than you would like. If you want to save some money in terms of fees, it might be worth it to see if you can use a direct stock purchase plan.

With a direct stock purchase option, you buy your shares directly from the company, via that company’s transfer agent. Some direct purchase options are completely free to you, with the company itself assuming the costs associated with having the transfer agent complete the transaction. In other cases, though, you may have to pay a small fee. Many direct purchases come with fees of between $1 and $5. That’s still better than a large number of the transaction fees paid to discount brokers.

You can make a one-time purchase, or you can set up a plan. Direct stock purchase plans can also provide you a way to take advantage of dollar cost averaging. You open an account with the company’s transfer agent, and then you can arrange to have money automatically deducted from your checking account each month to buy shares, or partial shares.

If you use a direct stock purchase plan to buy dividend stocks, you can enjoy the ability to steadily build your income portfolio. Many dividend paying companies that offer direct stock purchase plans also offer DRIPs, so you can reinvest your dividend earnings automatically if you want.

Disadvantage to Direct Stock Purchase Plans

Of course, there are disadvantages to all such plans. Before you decide to purchase your dividend stocks through a direct stock purchase plan, you need to understand some of the downsides. The main downside is that, since you are on automatic, you can’t choose when to buy. This means that you might not always get the best stock price on your purchase. Your purchase is made at whatever price the stock is when the transaction is completed. If you are involved in dollar cost averaging, it usually evens out over time, but you might not have the same control as you would with a discount broker.

In the end, only you can decide if a direct stock purchase plan is right for you. Many beginners, though, find this mode of purchasing dividend stocks attractive because it allows them to use a small amount of capital, as well as save money in fees.