Even with discount brokerage firms, the fees charged to buy stocks can really hurt the portfolio of small investors. However, there are ways to purchase stock without a broker. Many companies allow investors to purchase stock directly from the firm, and most without charging fees or commissions. Purchasing shares of stocks without a broker offers great advantages, but it is important to note that there are some limitations.
Direct Stock Purchase Plan
Some large companies allow investors to buy and sell stock directly from them through a direct stock purchase (DSP). A DSP allows investors to bypass stock brokers and their fees. To do this, sign up with a company that offers a DSP. You must contribute at least the minimum monthly amount -- some companies only require $10 a month. The company uses a third-party bank to debit your contributions directly from your bank account. You contributions buy the number of stock you can afford. For example, if you contribute $100 and the stock currently trades for $25, your contribution allows you to receive four shares of stock.
Dividend Reinvestment Plan
Instead of offering a DSP, some companies offer a direct reinvestment plan (DRIP) for investors to purchase and sell stocks. A DRIP works similar to a DSP in that you purchase and sell stocks directly from the company and avoid paying brokerage fees. When a company declares a dividend, the company uses your dividends to buy you additional shares. Companies offer DRIPs to investors because it allows for a long relationship with shareholders. Most investors use DRIPs as long-term investments. As with a DSP, when you want to sell your stock, you go directly through the company by contacting the plan administrator.
Use a Specialized Service
A specialized stock service allows you to buy a single share of stock without the use of a broker. Many companies offering DSPs and DRIPs require you to own at least one share of their stock before participating in the program, and specialized stock services benefit investors needing that single share. You can also use the service to buy a single share of stock as a gift for someone else. Some specialized stock services offer shares in more than 200 companies, and many of the companies are Fortune 500 businesses.
Benefits and Limitations
The main benefit of investing through a DSP, DRIP or specialized stock service is the ability to eliminate brokerage fees. This is particularly advantageous to small investors. Another benefit of DSPs and DRIPs is that investors can still buy shares of stocks even with only a little money to invest. A limitation of DSPs and DRIPs is that you may experience a more difficult time trying to sell your stock than what investors experience at a brokerage firm. Instead of an instant transaction through a brokerage firm, you must submit paperwork to a plan administrator, which can be time consuming.
- U.S. Securities and Exchange Commission: Direct Investment Plans
- Investor.gov. "Stocks." Accessed May 16, 2020.
- DRIP Investor. "The Drip Answer Report." Accessed May 16, 2020.
- Brigham Young University. "22. Investing 5: Understanding Stocks," Page 465. Accessed May 16, 2020.
- Forbes. "Dividends and Dollar-Cost Averaging Provide Antidote to Bear Markets." Accessed May 16, 2020.
- DRIP Investor. "DRIP Investing Basics." Accessed May 16, 2020.
- Internal Revenue Service. "Frequently Asked Questions: Stocks (Options, Splits, Traders) 2." Accessed May 16, 2020.
- Internal Revenue Service. "Stocks (Options, Splits, Traders)." Accessed May 16, 2020.