You can make a direct investment in a company's stock through dividend reinvestment plans (DRIPs) and direct purchase plans (DPPs).
If a company in which you own stock offers a DRIP, you have the opportunity to re-invest cash dividends and capital gains distributions in more stock automatically each time they are paid.
In the case of DPPs, also known as direct stock purchase plans (DSPs), companies can sell their stock directly to investors without using a brokerage firm as intermediary.
Direct investment also refers to long-term investments in limited partnerships that invest in real estate, leased equipment, and energy exploration and development. In this type of investment, you become part owner of the hard assets of the enterprise.
You realize income from your investment by receiving a portion of the business's profits, for example, from rents, contractual leasing payments, or oil sales. In some cases you realize capital gains at the end of the investment term, if the business sells its assets.
These DPPs are largely nontraded and have no formal secondary markets. This means you will often have to hold the investment for terms of eight years or more, with no guarantee that any of the income or capital gains will materialize.
Many people make direct investments because there can be significant tax benefits, such as tax deferral and tax abatement, depending on the investment.
- Browse Related Terms: Capital gains distribution, Compounding, Direct investment, Direct purchase plan (DPP), Distribution, dividend, Dividend reinvestment plan (DRIP), dollar cost averaging, Fractional share, Growth, January Effect, reinvestment, total return, Total return index
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