How to Buy Stock Without a Broker
You Can Buy Stock Without Using a Stock Broker or Having a Brokerage Account
While there is no doubt that the most popular way to buy and sell investments is by opening a brokerage account, many new investors ask me how to buy stock without a broker. For those of you who want to go down this path to business ownership, you can do so with varying degrees of success - there is no requirement that you have to work with a broker to invest in stocks or mutual funds, particularly equity funds.
Direct investing offers some advantages and disadvantages, which you will need to weigh based on your personal situation, but my goal in describing how it works is to provide you with an overview so you have a better handle on how to invest without a broker by the time you're finished reading. You'll still need to make a decision about whether such an approach is appropriate for you given your unique circumstances and preferences.
1. You Can Buy Stock Without a Broker By Investing in Shares Through a Company's Direct Stock Purchase Plan
The first and often easiest method of buying stock without a broker is in situations where companies, often blue chips, sponsor a special type of program called a DSPP, or Direct Stock Purchase Plan. These plans were originally conceived generations ago as a way for businesses to let smaller investors buy ownership directly from the company, working through a transfer agent or plan administrator responsible for dealing with the day-to-day paperwork and transactions.
Most plans will allow investors to buy stock without a broker if they agree to either have a reasonable amount taken out of their checking or savings amount every month for six months (often $50 is the acceptable minimum) or they make a one-time purchase, often $250 or $500.
Ordinarily, the plan administrators batch the cash from those participating in the direct stock purchase plan and use it to buy shares of the company, either on the open market or freshly issued from the business itself, on predetermined dates.
The average cost of the purchases is weighed out or some other methodology is used to equalize the cost among investors with the stock allocated to the account of each owner. Just as you get a statement from the bank, the direct stock purchase plan statement arrives, in most situations quarterly, with a listing of the number of shares you own, any dividends you've received, and any purchases or sales you've made.
Some direct stock purchase plans execute trades commission-free. Others charge small transaction fees, frequently $1 or $2 plus a few cents per share, for each purchase and a larger fee, perhaps $15 plus a few cents per share, for a sale. These are a lot lower than what you'd pay at a full-service broker.
2. You Can Buy Stock Without a Broker By Taking Advantage of the Dividend Reinvestment Program to Add Additional Shares to Your Holdings
The next best way to buy stock without a broker is to enroll in a stock's dividend reinvestment program or DRIP. I've shared with you some of the reasons you should consider investing through a DRIP but it would be helpful to revisit them here so you understand the appeal. DRIPs allow you to take cash dividends paid out by the company you own and plow them back into buy more shares, charging either nominal fees or nothing at all depending upon the specifics of the individual plan.
For a typical stock, which may pay out a dividend four times a year, that's a lot of transactions over 25 or 50 years on which you aren't paying commissions. (In the United States, some brokers traditionally reinvest dividends in certain issues at no cost for clients so if you're fortunate enough to have such an arrangement, buying stock without a broker doesn't have as much appeal.)
Dividend reinvestment programs are often coupled with cash investment options that resemble direct stock purchase plans so you can regularly have money withdrawn from your checking or savings account, or send in one-time payments whenever you feel like, perhaps as little as $25, buying more shares of stock in a business as you might purchase something from a mail order catalog. In fact, when I was teaching you about how to make a UTMA gift, I gave you a glimpse into my own family's past of buying stock without a broker; how we gifted my younger sister $12,948.10 worth of Coca-Cola shares.
A lot of long-term investors have become adept at building wealth through these types of accounts, buying stock without a broker for years, even decades; janitors who left behind $8 million fortunes or retired old ladies who built up the equivalent of more than $34 million in 2016 purchasing power from their tiny apartments.
3. You Can Buy Stock Without a Broker By Acquiring a Single Share Through a Specialized Gifting Service
Up until recently, you could use companies that allowed you to buy a single share of stock to get your name on a corporate shareholder list, then enroll in closed direct stock purchase plans or dividend reinvestment plans that forbid outsiders who didn't already own the stock. Unfortunately, in the financial industry's decision to move away from paper stock certificates, this has become all but untenable. To take advantage of it, you'd need to pay a stock broker $250 or $500 in a so-called "nuisance fee" to issue the paper certificate. Instead, you'd be better off buying stock through a brokerage account and having it titled through the Direct Registration System. The problem is, you need a broker to do it.
This is one of those areas where the wealthy have an advantage over everyone else. If a rich investor has a relationship with an asset management company, he or she could probably get the Registered Investment Advisor to have one of the firm's institutional brokers place a trade on behalf of the client then transfer it as a gift to a child or family member through the DRS. The child or other recipient of the equity would now be able to buy stock without a broker in that particular business; granted access by those who could do it with ease.
Final Thoughts on Buying Stock Directly Without a Brokerage Account
These days, there's really no reason to avoid opening a brokerage account. Those of you worried about rehypothecation risk should opt to open a cash-only brokerage account, not a margin account. Make sure you are covered by SIPC insurance. If you are smart about the firm with which you are working and are only buying ordinary domestic common stocks, you can probably get away with trading costs and commissions for less than a trip to your favorite coffee shop.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.