The term "plan shares" is commonly used when referring to DSPs, DRIPs and ESOPs. So what does all this alphabet soup mean? A DSP is a direct stock plan, DRIPs are dividend reinvestment plans and ESOPs are employee stock ownership plans. How plan shares of stock are classified and treated varies among these investment plans.
Employee Stock Ownership Plans
An ESOP is a type of retirement plan. A company provides shares of stock or the money to purchase shares to the plan for enrolled employees. The actual plan shares are not distributed to the employee until he or she leaves the company. Instead, the assets may be placed into a trust. At retirement or if the employee leaves earlier for a different reason, the plan shares are then actually assigned to the employee's ESOP account.
Direct Stock Plans
Some public companies offer investors a means of purchasing shares of stock directly from the company or through a designated intermediary called a transfer agent without the help of a broker. In some instances, investors can accumulate plan shares by contributing specific dollar amounts at regular intervals. For example, a plan participant may be given the option to set up a regular monthly debit from a bank account and purchase shares in whole and partial amounts within the plan.
Dividend Reinvestment Plans
Dividend reinvestment plans work similarly to DSPs, with an added feature. The company or plan administrator allows investors to reinvest dividends by purchasing additional plan shares. By accumulating stock through a DRIP, the investor reaps the rewards of compounding. Some companies require that investors purchase a specific number of shares to be eligible for the reinvestment plan. However, some companies offer participants plan shares at a lower price than the current market price of the stock when purchased with reinvested dividends.
Investors who buy stock through DSPs and DRIPs don't have to pay brokerages fees and commissions, although some plans charge a nominal fee and require a set minimum investment. However, plan shares can't always be sold at the time and price of the investor's choosing. Instead, the plan provisions may designate specific days for sales, and it can take a week or more to liquidate the plan shares at an intermediate price per share.
Video of the Day
- BNY Mellon: Stock Purchase - Dividend - Investor Relations
- Computershare: MCDirect Shares A Direct Stock Purchase and Dividend Reinvestment Plan for McDonald's Corporation Common Stock
- The National Center for Employee Ownership: An Introduction to the World of Employee Ownership
- U.S. Securities and Exchange Commission: Direct Investment Plans, Buying Stock Directly from the Company
- U.S. Securities and Exchange Commission: Employee Stock Ownership Plans (ESOPs)
- Comstock Images/Stockbyte/Getty Images