Guide to Direct Investment Plans

A direct investment plan is a type of plan that involves buying stock directly from a company instead of through a traditional broker. Many companies offer these plans to investors once you own a share of stock in the company. This type of plan can help you save money on transaction costs and accumulate a larger number of shares than you would otherwise be able to.

Function

• The purpose of a direct investment plan is to allow investors to skip the middle man and invest directly in a corporation. Some companies only make this plan available to employees of the company or those who already own some stock. Many investors who find a company that they believe in strongly prefer to buy stock directly from the company instead of going through the traditional channels.

Dividend Reinvestment

• Another type of direct investment program is a dividend reinvestment plan. With this type of plan, you can automatically buy stock with the dividends that a company issues to you. This is similar to a direct purchase plan except that the company uses the money from the dividends to add additional shares to your portfolio. This can be a very powerful way to grow your portfolio because you are increasing your dividend each time, which in turn, increases the number of shares that you buy.

Automatic Payments

• One of the common features of a direct investment plan is an automatic payment plan. Many companies allow you to set up an automatic monthly payment to be debited from your bank account to purchase more shares of stock. This type of program even allows you to buy partial shares of stock in some cases. Since the price of the stock will not always easily divide into the amount that you are investing, they help you by offering partial-share purchases.

Benefits

• One of the primary benefits of using a direct investment plan is that you can avoid broker commissions. When you buy stock from a traditional stockbroker, you have to pay him a fee each time you process a transaction. If you are the type of person that wants to periodically buy stock, this can add up significantly. Another benefit of this type of program is that it can help you accumulate shares faster with the automatic purchase feature.

Warning

• Even though this type of investment plan can help you eliminate investment fees, there are some potential drawbacks associated with it. Many investors who use this type of plan tend to put too much of their investment capital into a single company. While this could work if you pick the right company, it could also backfire. If the company goes out of business, you have essentially thrown your money away. A more diversified strategy may work to your advantage.