TeenBusiness.com > Teenvestors > Direct Purchase Plans > Why Companies Offer Direct Purchase Plans

You may be wondering why companies would want to encourage small-time investors to buy their stock by offering DRIPS and Direct Stock Plans. The answer is quite simple -- companies that offer some form of stock purchase plans see them as a way to encourage an investor to become a loyal customer. For example, if you own shares in McDonald's (assuming you occasionally eat fast food), chances are that you would rather buy McDonald's food than Burger King's. In addition, Direct direct purchase plans give companies a cheap way to raise money directly from investors rather than going through investment bankers who would underwrite stock offerings.

Advantages of Direct Purchase Plans

Direct Purchase Plans have three significant advantages over buying shares directly from a broker:

Teenvestors Can Afford It

Direct Purchase Plans allow Teenvestors to get into the stock market cheaply. Many companies with Direct Stock Plans and DRIPs allow you to make additional share purchases (full or fractional shares) with as little as $10 once you join their plans. After opening the account, you can invest as little or as much as you want. In fact, you can buy fractions of a share of stock if you don’t have enough money to buy a full share (after you have met the company’s initial purchase requirement).

Fees Are Low

Compared to the typical broker, the fees for investing in Direct Stock Plans and DRIPs are very low. There is usually a one-time initial set-up fee of $5 to $15 for an account. Some of these plans charge as little as 3 cents to 15 cents in fees for each purchase of stock, while others charge $2 and up.

The Plans Allow Dividend Reinvestments

Stocks pay dividends every 3 months. Instead of pocketing that money, you can have the plan reinvest it in the company’s stock. If you know anything about the power of compounding, you know that reinvested money can earn you higher returns on a compounded basis.

Disadvantages of Direct Purchase Plans

Direct Purchase Plans also have some disadvantages you should be aware of:

Record Keeping Is Critical

You must keep good records of all your purchase, including dividend payments made to your account even if you reinvest those dividends.

Timing Of Purchase & Sales

You can only buy or sell shares for your Direct Stock Plans and DRIPs on specific dates that are determined by the companies offering these plans. For example, some companies may only buy or sell stocks for you once a week, while others may buy or sell stocks for you once a month or even once every 3 months. This means that if stock prices are moving around a lot, you can never tell the price at which you will end up buying or selling the stock. This shouldn’t really be a big problem for most Teenvestors if they are investing, as we recommend, in big, stable, large-cap companies whose stock prices don’t fluctuate as much.

Minimum Initial Investment Amounts Can Be High

Even though there are lots of companies that require initial investments of only $100 to $250, there are some companies that require much higher initial investments. For example, McDonald’s has an investment minimum of $500. You should be aware, however, that after the initial investment amount, you can make subsequent investments that are as small as $10.