There are a few circumstances in which a person can buy stock directly from a company. The following is meant to cover some of these instances, which include direct stock purchase plans, dividend reinvestment plans (DRIPS) and employee stock purchase plans (ESPPs).
Direct Stock Purchase Plan
This is when a person buys stock directly from the issuing company. There are a number of well-known companies that will sell stock directly to individual investors. Most companies that offer this kind of purchase option don’t charge investors a commission, and if they do, the commission or service charges is very low compared to buying stocks through a broker. If you’re buying a very small number of shares and want to minimize your costs, a direct stock purchase is a great way to go.
Dividend Reinvestment Plans
Investors who own shares in a company with a dividend reinvestment plan (DRIP) have the option of registering with the company and participating in the plan. Instead of receiving dividends from the company, DRIP participants‘ dividends go directly toward buying more stock in the company. As with direct stock purchases, there are often no commission charges associated with DRIPs. (For more on this, read The Perks Of Dividend Reinvestment Plans and What is a DRIP?) Here’s how it works:
Company A pays a dividend of $0.50 per share on an annual basis, and its stock is worth $40 per share. A DRIP participating investor owns 200 shares of Company A’s stock. Instead of receiving a $100 check each year in dividends, the investor can buy 2.5 shares ($100/$40 per share) of stock. These shares are given directly from the company and no commission fees are charged.
Employee Stock Purchase Plans
For employees that work for public companies, ESPPs provide a great chance to buy the company’s stock at a discount. Employees are limited in the number of shares they can buy, and it’s not always a good thing to increase your holdings in your employer’s company – it’s a bit like putting all of your eggs into one basket. In general, ESPPs offer employees the chance to buy stock for 85% of the market value. These stocks can go directly into a retirement fund, so there’s usually an opportunity to participate in ESPPs with untaxed income; in these cases, money is deducted from an employee’s salary.