If you want to buy and sell stocks, you typically need to go through a stock broker. But a broker usually charges a fee for stock transactions, in addition to annual account maintenance fees. If you want to skip the fees and venture out on your own to make trades, it is possible to buy stocks online without going through a broker.
Want to learn how to purchase a stock without a broker? In this article, we walk you through a few different ways to buy stocks online without a broker, including:
- investing through a company’s direct stock purchase plan,
- using the dividend reinvestment program to add additional shares,
- acquiring single shares through a specialized gifting service, and
- using an online brokerage account.
While working with a broker is the most common way to trade stocks, you don’t necessarily need to use a broker to make money trading stocks. Read on to learn more about how to invest in stocks without a broker.
What Is a Broker?
Many of our clients ask us, “Do I need a stockbroker to buy stocks?”
A stock broker is someone who executes purchases and sell orders for stocks and other securities, typically on behalf of clients. Brokers have access to one of the major stock exchanges, such as the NASDAQ or New York Stock Exchange.
Brokers are also sometimes called investment advisers or registered representatives. Brokers are licensed by the Financial Industry Regulatory Authority, or FINRA. Brokers usually work for a brokerage firm. Brokers receive commissions for executing trades.
There are two kinds of brokers: full-service brokers and online/discount brokers. Full-service brokers are probably the type that you imagine when you think of a broker. These are the traditional stockbrokers who learn all of the details of your financial situation, including your income, time horizon, risk tolerance, assets, debts, and so forth, and then work with you to develop a long-term financial plan that could include retirement planning. They usually charge a set fee for these services, in addition to a fee that is charged per trade.
However, the most common type of stock broker firms are discount brokers, or online brokers with great pricing. Online brokers typically do not provide financial advice, and as a result they’re less expensive to work with. You are usually charged on a per-transaction basis, but you can often open an online account with a discount broker for free. Once you’ve created an account, you can log on and trade stocks instantly.
Can you buy and sell stocks online without a broker? The simple answer is: yes! Read on to learn more about how to buy stocks without a broker.
1. Invest Through a Company’s Direct Stock Purchase Plan
Probably the easiest way to buy stock without working with a full-service broker is investing through a company’s direct stock purchase plan, or DSPP. In short, this is where you purchase stock directly from the company.
DSPPs are usually sponsored by blue chip companies. Blue chip companies are nationally recognized companies with a good reputation for profitability over time, and are usually considered to be safe investments.
Most DSPPs allow small investors to purchase stock directly from the company via a plan administrator or transfer agent.
The minimum investment amount for DSPPs varies, but it usually ranges from about $25 to $2,500. You can schedule weekly or monthly purchases through a DSPP, which can potentially allow you to reduce risk. DSPPs also allow you to invest small amounts of money rather than by number of shares.
DSPPs usually charge a small fee to set up your account, plus transaction fees for trades and charges for reinvesting the dividends. But some companies don’t charge a fee for stock purchases, and some don’t even charge a fee to set up the account or reinvest the dividends.
If you invest in a DSPP, you can expect to receive a quarterly statement that enumerates the number of shares that you own as well as purchases and sales you’ve made and dividends that you’ve received.
While DSPPs can be a useful investment, especially for those just starting out, it’s important to understand the drawbacks as well. Investing solely in DSPPs could mean that your portfolio is not adequately diversified. It also means that you don’t get to choose the purchase date of your stocks, or choose from the variety of companies that have shares on the market.
2. Use the Dividend Reinvestment Plan to Add Additional Shares
Another way to invest without going through a full-service broker is to use the dividend reinvestment plan, known as DRIP, to add additional shares to your portfolio of holdings.
Typical stocks normally pay out dividends four times per year. Some brokers allow you to reinvest the dividends that you earn for free. In other words, DRIPs allow you to take the cash that you would pocket and put that back into buying more shares.
Dividend reinvestment programs can also be coupled with cash investment options that allow you to send in one-time payments whenever you want to buy more shares in a company. Thus, DRIPs allow you to purchase more stocks without paying a broker’s fee.
DRIPs have similar drawbacks to DSPPs. Like DSPPs, DRIPs don’t really allow you to diversify your portfolio without making investments elsewhere. You also don’t have control over the purchase date of the new shares.
3. Acquire Single Shares Through a Specialized Gifting Service
If you’re lucky enough (or wealthy enough) to have a relationship with an asset management company, acquiring single shares through a specialized gifting service is another way to get around paying a brokerage fee. In this type of transaction, a Registered Investment Advisor can place a trade on behalf of their client, and then transfer the stock as a gift to a family member via the Direct Registration System.
The Direct Registration System allows investors who don’t want their stock registered in the name of their brokerage firm to buy and sell directly through a transfer agent. But this is a fairly limited option; certainly not one you would use to build a large or diversified stock portfolio.
4. Use an Online Brokerage Account
The best way to avoid paying the fees of a full-service broker is to use an online brokerage account. Discount online brokers are the best option for self-directed investors who want to do their own research and make their own trades rather than relying on a broker’s advice. While online brokerage accounts usually charge fees, these are nominal. In exchange, you get the ultimate control over your portfolio.
Do your research when you’re shopping for an online broker. Some companies charge fees for certain kinds of live customer service support, and the quality of support can also vary widely. Learn from a company’s website about what kind of services they offer. You might even call their customer service line to see the quality of service that they provide for yourself.
Make sure to check whether the company is providing special promotions and whether there’s a minimum balance that you’ll need to keep in your account.
Once you’ve selected a company, go online and open your brokerage account. Most companies have an “Open an Account” link on the site. You’ll need to provide key pieces of information including your email address, name, and social security information. However, it’s generally pretty simple to open an account online.
You’ll also have a choice between two kinds of accounts: a cash or margin account. Cash accounts require that you pay the full amount due on a transaction by the settlement date. With a margin account, however, you may borrow from the broker to fund additional investments, while pledging securities as collateral for the loan, and paying interest on the money that you borrow. Which type of account you choose will likely depend on your level of experience in trading as well as your risk tolerance.
Once you’ve opened your online account, you’ll need to fund it. You usually have between 10 and 14 days from opening your online account to transfer money into it. You can do that via a variety of means, including writing a check, making a direct deposit, making a transfer from an external brokerage, or depositing a physical stock certificate into your account.
Once you’ve funded your online account, that’s it. You’re ready to start making trades without working through a full-service stock broker!
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