Advantages & Disadvantages of Stocks Directly From the Company vs. a Broker

You may be the sort of person who likes to cut out the middleman in any transaction and so you're asking if you can get stock in a company without going through a broker. Many publicly traded companies offer direct stock purchase plans. A DSPP is an investment account you use to buy stock directly from the company. DSPPs have some real advantages for small investors. They have some disadvantages as well, so you need to think things through before jumping into this form of investing.

DSPP Basics

Big corporations like Walt Disney, WalMart and McDonald’s offer DSPPs to attract individual investors. Basically, a DSPP is an investment account dedicated to the stock of a single corporation. You open a DSPP with the company’s transfer agent because the Securities and Exchange Commission requires publicly traded companies to use a third-party transfer agent to handle securities transactions. Some transfer agent firms like Computershare and Bank of New York Mellon handle DSPPs for hundreds of companies. The stock you buy is automatically registered in your name, which means you’ll receive annual reports and other updates. When you buy stock from a broker, shares are typically registered to the brokerage firm and credited to your account. Companies frequently let you reinvest dividends at no charge and set up your DSPP as an IRA if you wish.

Low Fees

A big advantage of buying stock directly from a company versus a broker is that it’s cheap. According to Bankrate.com, brokers typically charge anywhere from $8 to $45 per transaction. DSPP plans charge as little as $1 to $3, plus 3 to 12 cents per share. When you consider opening a DSPP with a company, read the plan brochure or prospectus carefully. There is sometimes a one-time set-up fee and the charges for selling shares are usually higher.

Small Amounts

Some people, especially those just starting their careers, want to save and invest but just don’t have a lot of spare cash. If this describes you, DSPPs just might be your cup of tea. Initial investment minimums usually range from $250 to $500. However, a lot of companies waive this requirement if you set up automatic debits of $25 or $50 per month from your bank account. This not only makes investing with a DSPP affordable, it is a great way to save money on a regular basis.

Lack of Flexibility

The downside of direct stock purchase plans boils down to lack of flexibility. You cannot buy or sell anything but the stock of a single company and you don’t get access to the research information and other services brokerage firms offer. If you want to use DSPPs to buy shares in more than one company, you have to open a separate account for each one. Another problem is that all of your investment eggs are in one basket if you have just the one DSPP because there is no way to diversify your investments. To get the risk-reducing benefits of a diversified investment portfolio, you need a brokerage account that allows you to invest in a variety of securities if you want to avoid opening up a baker's dozen or more DSPP accounts.

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.