If you’re in the market to invest in stocks you might be weighing the options of buying stock with a stockbroker, through a brokerage account, or purchasing directly from a company itself.
Knowing how to buy stock directly from a company is key if you’re looking to cut out the middleman and the high fees associated with a broker or brokerage account. This can be done through Direct Stock Purchase Plans, also known as DSPPs, and can be a good option if your primary goal is to obtain a single company’s stock.
Read on to learn more about your options for buying stocks without a broker and whether a direct stock purchase plan is the right choice for you.
Buy Stock Directly With a Broker
Stockbrokers are often classified into two categories, traditional stockbrokers and online stockbrokers, both of which can help you buy your first stocks.
Traditional stockbrokers, also referred to as full-service stockbrokers, are individuals well-versed in the stock market and finance management that not only help you invest in stocks but can help you develop a long-term financial plan.
By getting to know you personally and financially, full-service brokers do just as their name suggests — they offer a wide variety of financial services. By looking at factors like marital status, lifestyle, personality, risk tolerance, age, income, assets, debts, and more, full-service stockbrokers go beyond investment support to help you with things like financial planning, estate planning, and tax advice.
If you’re not only interested in investments but want help managing your financial needs into the future, full-service stockbrokers give you everything in one place. That being said, full service also means expensive fees, which is why some people might choose to go the route of an online stockbroker or invest in stocks directly through a DSPP.
Online stockbrokers don’t provide investment advice. Rather, they simply help you purchase stocks. This can make them much less expensive than a full-service broker and one of the easiest ways to buy stocks, as you can often get set up and purchase stocks in a matter of minutes. However, since online stockbrokers don’t offer investment or financial advice, you’re on your own to manage your investments and learn as you go.
Because you have to set up an account with an online broker, it does make the transaction of instantly buying and selling stocks relatively hassle-free. And if you have a good handle on managing your own investments, online stockbrokers or a brokerage account can be the way to go.
How to Buy Stock Directly Without a Broker
In addition to full-service and online brokers, investors have the option to purchase stocks directly from a company — one of the simplest methods of buying stocks without a broker. Essentially, a DSPP is an investment account dedicated to the stock of a single corporation.
Direct Stock Purchase Plan (DSPP)
Direct Stock Purchase Plans (DSPPs) are a way to cut out the middleman to purchase or sell stocks and requires the investor to engage with the company directly, rather than a broker. No two DSPPs are exactly alike, but there are some common advantages and disadvantages across the board.
Investors will need to contact a company’s investor relations department to get started with a DSPP.
Advantages of Direct Plans
DSPPs have some real advantages that you won’t get with an online or a full-service stockbroker:
- DSPPs let smaller investors buy ownership directly from large companies or corporations — e.g., Walmart, McDonald’s, or Disney.
- Buying stock directly from a company cuts out the high fees associated with brokers.
- DSPPs allow beginner investors or individuals without a lot of extra money to spare invest without putting too much money aside.
- They also allow for better communication between the company and its investors.
Disadvantages of Direct Plans
While DSPPs have some strong advantages, they also have some disadvantages that need to be considered:
- DSPPs lack flexibility, as you cannot buy or sell anything except the stock of a single company. If you want to buy shares for more than one company using a DSPP, you must open a separate account for each.
- DSPPs do not allow you to buy or sell your stocks at a specific market price or at a specific time. Instead, the company will purchase or sell shares for the plan at established times and at an average market price.
- You may need to pay a fee for the service of a DSPP.
- Some companies require that you already own stock in their company before you’re allowed to participate in a DSPP and some plans require a minimum investment.
Dividend Reinvestment Plan (DRIP)
Stocks can also be bought through a Dividend Reinvestment Plan (DRIP). A DRIP is a program that allows you to buy shares (or fractions of shares) of stock in a company with the dividend payments from that same company.
The way DRIP investing works is that when you buy dividend stocks, the company you own stock in pays you a portion of their earnings as dividends (a distribution of the company’s profits per share), based on the number of shares you own. Because dividends provide cash flow from stock investments without requiring you to sell shares, this is often used as a strategy for generating income and saving for retirement.
Employee Stock Purchase Plan (ESPP)
An employee stock purchase plan (ESPP) is a program offered by a company that allows its employees to purchase company stock at a discounted price — as much as 15% in some cases.
In an ESPP employees contribute to the plan through payroll deductions, similar to the way health insurance or a 401K investment are taken out of a paycheck. While ESPPs are open to all employees, they do have some restrictions, like requiring employees to be employed with the company for a year or more, or limiting the program to individuals who own less than 5% of company stock.
How to Buy Stock Directly: Step-By-Step Instructions
Buying stocks directly through a DSPP is pretty straightforward, but there are some important considerations that need to be followed leading up to your first investment.
Step 1: Decide How You Want to Buy Stocks (Broker vs. Non-Broker)
Ultimately, you have to consider why you’re investing and your experience level to decide how you want to invest in stocks.
A primary advantage of buying directly from a company over a broker is the simplicity of the process. While apps and websites have streamlined the online brokerage experience, DSPPs are as simple as sending the money to the company and being enrolled in an investment program.
Step 2: Research Stocks That You Want to Buy
Once you’ve chosen to purchase through a DSPP, the next step is researching which company you want to purchase stock in. It’s important to keep in mind that not all companies listed on public stock exchanges offer DSPPs; however, there is a long list that do.
Ideally, you don’t want to invest in a company just because it offers a DSPP — you’ll want to select a good long-term company with low risk. Evaluate the company’s annual report, public financial records, history, and current financial standing to determine if this is a company you should invest your money in.
Some of the well-known companies that offer DSPPs include:
- The Home Depot
- Campbell Soup Company
- Johnson & Johnson
However, this is not an exhaustive list. For a more complete list, check with your banking institution for a more comprehensive list of companies that specialize in DSPPs.
Step 3: Decide How Many Shares To Buy
There’s no single answer to this question as the number of shares you buy greatly depends on your personal financial situation. However, when deciding how many shares to buy, you’ll want to consider a handful of factors, including:
- How much money you have to invest and are willing to lose
- If you want to diversify your investment portfolio
- Fees associated with DSPPs
- If fractional shares are supported through the DSPP you’re interested in
Step 4: Choose Your Order Type
When an investor places an order to buy or sell stock there are two execution options: market orders and limit orders.
Market orders are the most basic kind of trade,where an investor (via a broker or brokerage account) buys or sells stock immediately at the current market price. As the investors opt in to whatever the prices of these shares are going for, the trade can be fulfilled quickly at the price the security is currently at.
Limit orders, also known as pending orders, are trades investors make when the price is right. The way limit orders work is that investors get to name the price they want to pay on a stock, and if the stock reaches that price in the future, the order will be filled. However, limit orders have some disadvantages, primarily that you’re not guaranteed to trade the stock, which can only be fulfilled if the stock’s market price reaches the limit price.
Additionally, even if the stock hits your limit, there’s a chance it may not be executed due to limited supply and demand.
Step 5: Learn to Optimize Your Stock Portfolio
Having a well-diversified portfolio is in your best interest for consistent, long-term investment growth, and there are a handful of considerations to take into account when buying stock from a company.
- Analyze your financial goals: Start with conducting a personal and honest assessment of your financial goals, why you are investing, what you intend to do with your profits, and how much risk you’re willing to take.
- Build your knowledge in stocks: The more information you can gather on investing, the better. Take courses, talk to finance professionals, and study individual stocks within each class. Become familiar with asset allocation — a strategy that aims to balance risk and reward by allocating a portfolio’s assets to an investors financial goals.
- Establish an exit strategy: No matter what your investment timeline might look like, knowing when to trade stocks without emotion is crucial to optimizing your portfolio and preventing large financial setbacks.
- Strategize and buy: With investment goals, risk tolerance, and investing timeline in mind, develop a strategy that correlates with your financial goals.
Frequently Asked Questions
How do I know if a company has a direct stock plan?
To find out if a company you’re interested in purchasing stock from has a DSPP, you’ll want to look for the company’s investor relations information on its website. Additionally, many large banks will have a list of companies that offer direct stock plans.
When is a good time to buy stocks?
There’s no black and white answer when it comes to the right time to buy stocks. However, one thought process is to buy as soon as you have money available and even if the market falls after investing, you’ll have time to make up for those losses if you’re invested before the recovery starts.
Are stocks and shares the same things?
Essentially owning “stock” and owning “shares” are one and the same — you have ownership or equity in a company. “Shares” often refer to the size of an ownership stake in a specific company where the term “stock” is used to describe equity as a whole.
How many shares can I buy?
How many shares you can buy is essentially how many you can actually afford. Take the amount of money you wish to invest and divide by the current price the shares are selling for. This number is how many shares you can buy. Consider if you’re allowed to buy fractional shares. If not, round that number down to the nearest whole number.
Is it possible to buy less than one share of stock?
Yes. While not super common, some companies or brokers sell fractional shares. This can be especially beneficial for investors who want access to company stock at high share prices, where they may not be able to purchase a full share otherwise.
How much money do I need to buy stocks?
The amount of money you need to buy stocks depends on the price of the stock plus whatever fees are associated with DSPPs or brokerage fees. Some online brokerage accounts have zero transaction fees and no account minimums, making it easy to purchase as little as a single share. You’ll also want to consider if you’re able to buy fractional shares as this will factor into how much money you need to purchase stocks.
Of course, stock prices are always changing and the more you invest the higher your potential for return is in the long run.
How do you make money from stocks?
Stocks can make you a profit in a few ways: selling stock shares at a higher price than what you paid for them, short-selling, and through collecting dividends.
Short-selling is a technique where you bet on a stock declining in value. An investor borrows shares of stock, sells them on the open market, buys them back when the price drops, and returns the shares to the lender — in which case a profit is pocketed.
Collecting dividends is an easy way to make money on stocks as many pay dividends. In some cases, there is an extra reward for shareholders in the form of cash or additional shares of stock.
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