Many people mistakenly believe that they need to be rich in order to invest in the stock market. But there are ways that people with modest savings can own shares of the stocks they like. One of the best ways to do so is by using what are known as direct stock purchase plans, which let investors go directly to the companies of their choice to make small investments in stock.
Direct stock purchase plans vs. brokers
Most investors who have larger amounts to invest open brokerage accounts. Working with a broker allows you to keep all of your stocks organized within one account, and it makes it easier to buy and sell shares of whichever stocks you want when you choose to make additional investments.
Direct stock purchase plans work differently. With these plans, you make an investment directly with each company in which you want to invest. Most companies work through a clearinghouse such as Computershare to offer their shares in a direct stock purchase plan, but you'll still have to enroll separately with each plan.
Benefits and disadvantages of direct stock purchase plans
Direct stock purchase plans have some advantages over using a broker, but there are also shortcomings. The biggest benefit is that you can buy stock with relatively small investments. The minimum investment varies from company to company and can be as much as $2,500 in some rare cases. However, it's much more common to find minimums in the $200 to $500 range, and some well-known stocks let you start with as little as $50. In addition, some programs will waive or reduce the minimum if you commit to automatic monthly investments taken directly from your bank account. Once you've established a plan, additional investments are allowed, and they typically can be even smaller amounts than the initial minimum.
The low investment minimums for direct stock purchase plans come with some trade-offs. You'll usually pay a setup fee, and some plans charge fees for subsequent investments. In addition, selling the stock you've bought in a direct stock purchase plan is more complicated than a brokerage account, as you'll have to wait for payment directly from the company and might also face additional fees. Not all plans can support special types of accounts, such as tax-favored retirement or educational savings accounts.
On the whole, though, investors with modest amounts to invest should take a close look at direct stock purchase plans. By opening the door to investing in individual stocks for as little as $50, direct stock purchase plans can help you push your investing prowess to the next level.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.