If you read my previous article about the beginner’s guide to the stock market, you might recall that I mentioned that the best way to start investing in the stock market is by opening a brokerage account. And since then I’ve been asked a lot of times that if there’s a way to invest without having to deal with the broker. And in this article, I’m going to tell you how to buy stocks without a broker.
Before we get started, you should know that there are always advantages and disadvantages with both ways of investing. And you can be successful with either of them, depending on your current situation.
I will be listing both, the advantages and disadvantages of direct investing, and then you can weigh them based on your personal situation. My primary goal here is to help you understand how this works. So when you finish reading this article, you can easily decide whether you want to go the direct investing route or have a stockbroker.
1. Invest in Stocks Without a StockBroker Through Direct Stock Purchase Plan
This is probably the best and the easiest method of buying stock without a stockbroker. This might sound like a new thing, but companies have been using this method for decades. A lot of blue chip companies have a special type of investor program called DSPP or Direct Stock Purchase Plan.
In this plan, they offer small investors to directly buy ownership from the company.
The company has their own agent, also known as the plan administrator who is responsible for doing the day-to-day paperwork and transactions.
These companies do charge a fee for opting for the DSPP plan and they offer the investor to either pay the fee in installments for 6 months, or they can choose to pay all of it as a one-time payment. Usually, the monthly fee is $50 which is a reasonable amount. And if investors choose the one-time payment option, they can pay $250 or $500 in one go.
With the cash received from the investor, the plan administrator then uses the cash to buy shares of the company listed on the open market or the freshly issued stocks from the business itself.
The best part about going with a DSPP is that you get a detailed quarterly report of all the stocks that you own, any sales/purchases that you’ve made, etc.
With some DSPP’s they do charge a nominal fee while executing the trades, but these are usually a lot lower compared to what you would be paying a full-service broker. These fees range from $1 to $2 and a couple of cents per share for when you purchase a stock. And if you’re selling it, they can charge around $15 plus a couple cents.
2. Acquiring Stocks Through Specialized Gifting Service Without a Broker
Very recently, you first had to buy a single share of a company and get your name on the corporate shareholder list. And only after that, they would allow you into their closed direct stock purchase plans or dividend reinvestment plans.
The dividend reinvestment plans are forbidden to outside investors who do not own the company’s stock.
This is one of those methods where you will need a stockbroker to get your foot in the door.
You would basically be buying the stock off the broker through a brokerage account and have this stock titled as Direct Registration System.
This is one of those cases where the more wealthier you are, the more advantage you would have compared to others.
Let’s say that you are a wealthy investor and have a great relationship with an asset management company. Then the investor could have one of the firm’s brokers to place a trade on behalf of the investor and then transfer the stock to a family member of the investor as a gift through the DRS.
Once the family member receives the stock, he or she could buy stocks within that company without a broker and do it with ease.
3. Taking Advantage of the Dividend Reinvestment Program to Buy Shares Without a Broker
This is the 3rd best way to buy stocks without having to deal with a stockbroker. While there might be a lot of reasons why you should enroll yourself in a company’s DRIP, this is one of the big reasons.
The basic definition of DRIP is that the company pays a dividend in cash to their shareholders, and you can use that cash to buy more shares of that company.
You will have to do the research about how much the company would charge for this program. There are some blue chips companies that do not charge anything.
If you follow Warren Buffet’s advice to the T, then you might prefer investing in a particular company for years, if not, decades to come. And companies pay out dividends 4 times a year. And that clearly is a lot of transactions and new stocks being bought for which you are not paying a commission to a stockbroker.
However, there are some stockbrokers who offer the same service for free. And if you have a similar arrangement with one right now, then buying stocks without a stockbroker might not sound very appealing to you.
You can literally build up a fortune by this type of investing over the years. There have been articles about how normal middle-class people like you and me accumulated wealth in millions of dollars over the years by just doing this.
I will end it by saying that there is literally no reason why you should avoid getting a brokerage account. It only makes things easier. And if you are worried about rehypothecation, then you should choose a cash-only account instead of a margin account. To protect yourself even more, you should make sure that you are covered by SIPC insurance.
About the commissions and fees, by not opening a brokerage account, you can probably get away by just trading domestic common stocks and paying nominal transaction fees. By if you are serious about investing and accumulating wealth over decades to come, then you should seriously think about opening a brokerage account.
That’s mainly because somewhere or the other, you will need a broker to make the path easier for you. And in some situations, it might not be worth it for you to spend that much time avoiding the big SB (stockbroker).