While many investors choose to buy and sell investments through a brokerage account, you may wonder how you can do so without a broker. In that case, you may want to look into a direct investment plan.
If your primary goal is to obtain a single company's stock in the most direct way possible, one of these plans can help you achieve that goal. Just be aware of the drawbacks you might come across if you stop using brokerage services completely.
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. 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. 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.
What Are Dividend Reinvestment Plans?
Companies may also offer a dividend reinvestment plan (DRIP). These are like direct stock plans, except they automate the process of buying more stock over the years. DRIPs take cash dividends paid out by the company whose stock you own and use them to buy more shares. Depending on the details of the plan, this service may be free, or there may be small fees.
In the U.S., some brokers reinvest dividends in certain issues at no cost to clients.
DRIPs are often coupled with cash investment options that are much like direct stock purchase plans, which gives you the ability to buy more stock any time you want, not just the four times per year when a company's dividends are issued.
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.
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.
For traders who want to explore their options, using a broker may be the best option.
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. 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.
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