How to Buy Stocks Online Without a Broker – You want to learn how to buy stocks online without a broker. However, the cost of investing directly at a stock exchange seems a little high. So should you invest at a discount brokerage firm? In this post, we will go over the benefits and drawbacks of using a discount broker.
Do you want to learn how to buy stocks online without a broker? In this post, I will share everything you need to know about buying stocks without a broker. I have put together a comprehensive guide that has been helping thousands of beginners buy stocks for decades. The guide covers how to find the best stock broker, what brokerage firm should I use, and other considerations for first-time investors.
Table of Contents
What Are Direct Stock Plans?
Often, the simplest method of buying stocks without a broker is through a company’s direct stock plan (DSP). These plans were created years ago as a way for businesses to let smaller investors buy equity straight from the company. Investors buy in by transferring money from their checking or savings account.
The company will come up with minimum investment amounts, for both the initial purchase and any later purchases.2 Sometimes, these minimums are lower than the price of a single stock, which can allow investors without much capital to buy small pieces of a company.
The plan administrators batch the cash from those in the direct stock plan, and they use it to buy shares of the company at the average market price.3
Just as you get a statement from the bank, the direct stock purchase plan issues statements with important financial information, such as a listing of the number of shares you own, any dividends you have received, and any purchases or sales you have made.
Advantages of Direct Plans
The main advantage of buying directly from a company rather than a broker is how simple it all is. Apps and websites have streamlined the broker experience, but you still have to choose among securities and decide which type of order to place for those investments. DSPs and DRIPs can be even simpler: All you have to do is send the money to the right place, and then you’re enrolled in the plan.3
Direct stock plans also allow for better communication between the company and its investors. When you invest through a brokerage, any notices from the company will come through the brokerage. If you have many investments, company notices can get lost in your inbox as messages from your brokerage, so you might miss those messages with potentially useful information. Direct communication between the company and investors is better.
If you’re an institutional investor, you may have access to extra benefits through direct stock purchase plans. It all depends on the company that issues the stock. Special “waiver discounts” could allow you to buy shares at a discount that isn’t made public.
Disadvantages of Direct Plans
The simple nature of direct plans can also be its main disadvantage. For instance, if you were to sign up for a Home Depot direct stock purchase plan, you would only have the option to buy Home Depot stock.
An investor with a brokerage account and an investor with a direct stock plan could buy the same Home Depot stock at the same price, but the investor with the brokerage account could also acquire any other security the brokerage services.
In the past, direct plans enjoyed the added benefit of commission-free or low-commission trades, but this benefit has mostly vanished in the digital era. Many brokerages—even major firms like Fidelity and Charles Schwab—have dropped their commission fees for online trades.67 It’s now just as cheap to get stock through one of these commission-free brokerages as it would be to buy through direct plans. In some cases, using a commission-free brokerage might be even cheaper.
DSPs can also impede your ability to time trades. Cashing out your position isn’t as simple as tapping a few buttons on an app. That is fine if you plan to buy and hold your stocks for decades. And if you mostly care about dividends, you may be content with direct plans. If you trade often and enjoy regularly rebalancing your portfolio, on the other hand, you might be frustrated by the limitations.
Here are the upsides to direct investing:
- Potential commission savings: The fees charged by direct investment programs can be lower than what some brokers charge. P&G, for instance, charges no fee for investments plus a 2-cents-per-share charge if you buy the stock using money from your bank account and just $2.50 plus 2 cents per share if you mail a check.
- Dividend reinvestments: Dividends can be reinvested for free. If you’re with a broker, you would often need to incur a commission to reinvest a dividend into the company stock.
As you might suspect, direct investing has some downsides:
- Not free for all transactions: Some companies even charge commissions that exceed what deep discount brokerages charge for certain services. Be sure to check the company’s Web site, usually in a document called a direct stock plan prospectus, and understand all the fees that are charged.
- Setup fees: Although opening a brokerage account is usually free, some direct investment plans charge a fee to get started. Some plans also have minimum initial deposits. P&G, for instance, requires $250 for a new account.
- Limited universe: By using direct investment plans, you’re narrowing your universe of possible investments to the hundreds of the largely older, blue-chip companies that offer these programs.
- Administrative hassles: With direct investment plans, you need to manage all your separate accounts, which could be a pain if you have ten or more investments.
DSPPs (Direct Stock Purchase Plans)
A direct stock purchase plan (DSPP) is best used if you’re interested in a business that’s gone public. Do your due diligence to confirm whether the company in which you want to invest offers a DSPP in the first place since DSPPs apply only to a select number of companies that offer stock to the public for long-term investment.
DSPPs also offer some notable advantages compared to the other plans that we’ll cover in just a moment. Arguably the greatest appeal of a DSPP is the passive and largely automated experience that investors will have. Simply contribute your desired amount of funds through a DSPP and have the option to contribute more at a later time that’s best for you.
Since DSPPs have such a hands-off approach to purchasing publicly traded stocks for the long-term, investor data privacy and security is less vulnerable to theft or abuse. In other words, they provide solo investors with the peace of mind that their investment data is unlikely to be sold or shared improperly.
With the knowledge that DSPPs are best suited for long-term investing, it’s safe to say that these plans aren’t the best options for investors who long for the agility of a licensed stockbroker or registered representative or the short-term trading made possible by a brokerage account. DSPPs also require that investors maintain their plans separately from other investment accounts, which can cause headaches for those who like having everything in one place.
Both DSPPs and DRIPs allow you to purchase stock from a company or broker, and sometimes without paying a fee. DSPPs in particular often use third party transfer agents to handle the transactions. However, the shares of a DSPP are also illiquid, meaning that it’s very hard for you to sell the shares without the aid of a broker. As a result, it’s best to have a long-term strategy before investing in a DSPP since you won’t have as much control over selling them. The transfer agent you use, for example, will most likely need to determine the trade date for the sell.
In the case of a DRIP, you can purchase shares of a stock using the dividends of the existing stock you already own. When the time comes to sell the shares, you can do so independently since there is no broker. However, depending on the stock you’ve purchased you may need to contact a third party transfer agent in order to place the market order to complete the sale. Something important to keep in mind with DRIPs is they aren’t sold on the actual market, so when you complete a sale the company you purchased the stock from in the first place will purchase the stock back from you.
Depending on your plan prospectus, there may be minimum dollar purchase requirements for both DSPPs and DRIPs, but it’s usually very low (around $10).
Conclusion
Not long ago, it was extremely challenging to purchase stocks online. Large companies would restrict their stock purchases to brokers. Nowadays, the internet has made everything possible, including buying stocks online. There are actually plenty of sites where you can buy stocks without a broker. You just need to know the best ones, the ones that will work for you, and how these all-online stock services can benefit you today.