Since the dawn of the stock market, brokers have been an integral part of the equity buying experience. Because it would be too complex and chaotic for individual investors to call up a major stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq, brokers act essentially as middlemen. They make the process more efficient by collecting orders, facilitating bulk trades at the exchanges, and then distributing securities and money back into the portfolios of clients.
As a matter of fact, as early as the 1300s, Venetian lenders would carry slates of information about various business interests to meetings with their clients providing a service that is much like that of a modern brokerage. Today, brokers can be found just about everywhere from traditional brick and mortar offices to companies that operate completely online.
While it may seem as though brokerages have solidified their role in the purchase of stocks, it’s not always 100 percent necessary that they be used. In fact, there may even be some advantages to cutting them out of the picture and buying shares by yourself.
The best way to buy stocks without a broker is to use what are known as direct stock purchase plans (DSPPs) and dividend reinvestment plans (DRIPs). A DSPP is when consumers buy shares of stocks outright from the issuing company. A DRIP is when quarterly dividend payments are used to purchase more additional shares from the issuing company directly.
In this post, we’ll explore DSPPs and DRIPs more closely and get a better appreciation for why investors may choose to buy stocks without a broker.
Because a brokerage is a service provider, it’s important to understand that their primary source of revenue comes from the commissions they charge for each trade. Back before there were computers and online platforms, calling up your broker was pretty much the only way a normal retail investor could buy stocks.
This dominance over the industry enabled brokers to charge whatever they wanted and in some investors’ opinions effectively get away with murder. As one veteran broker reflected, the average commission in the late 1980s was $45. However, that number could sometimes climb into the hundreds or thousands depending on the size of the order.
Some companies, especially the ones that were smaller and not as well known, knew was these high commissions were likely holding consumers back from investing in them. As a result, they lobbied and won the right to sell shares outright. This led to the creation of DSPPs and DRIPs.
A direct stock purchase plan is an arrangement where retail investors will buy stocks directly from the issuing company. The way a DSPP works is very straightforward:
There are generally fees and minimums associated with most DSPPs. However, they are usually sustainably less than what a traditional brokerage might charge. Every company will have different rules for their DSPP, and so the investor must read through them thoroughly before committing to a plan.
In order to participate in a DSPP, the issuing company has to offer such an arrangement. This will be up to the company’s discretion and may not be available for every stock you wish to own. Even though DSPPs were originally intended to help smaller companies, today many medium and large companies offer them too.
A dividend reinvestment plan is another type of direct purchase opportunity where individual investors can buy shares directly from the company that issues them. However, instead of using their own money, new shares will be purchased using the dividend payments that the company pays its shareholders.
Recall that with some stocks, the company will send its shareholders a cut of the earnings in the form of quarterly dividend payments. This is a great benefit because it provides the investor with some tangible income despite how the stock may be performing in the market.
Most people who invest in dividend-paying equities do so to supplement their income (such as retirees). However, if you don’t need the money or are looking to maximize your investment opportunities, then reinvesting these dividends in additional shares can be a lucrative strategy.
This is exactly what a DRIP is designed to do. The shareholder will enter into an agreement with the issuing company to hold back their dividend payments and instead provide them with more shares of the company’s stocks.
This can create a cycle of compounding returns. Through the purchase of more dividend-paying stock shares, the account holder can expect to earn more dividends. That means buying even more shares next quarter, and so on.
To illustrate how this works, we’ll refer to a case study from U.S. News where they used telecom giant AT&T (ticker: T) as an example:
Don’t forget too - If the company is performing well in the market, then its share price may also be appreciating. This means that when the investor is ready to sell, they’ll have more shares to cash in than what they originally started with.
For investors who are interested in a DSPP or DRIP, typically the best way to look for information is to visit the site of the company they wish to invest in. This is usually found under a link or page that may be titled “Investor Relations” or something similar.
For example, below is the investor relations webpage for Walmart. You’ll see that they have information, links, and phone numbers for those individuals who want to buy stocks directly or have their dividends automatically reinvested.
Walmart isn’t the only company to offer DSPPs or DRIPs. There are thousands of other recognizable brands that offer them too. Here are just a few of the most recognizable ones:
… and many, many others.
For anyone interested in browsing through the latest options, they can try searching a website like Computershare. Computershare is a company that provides private stock registration and transfer services for these issuing companies. Click on any of the companies listed and you’ll get a complete summary of their direct purchase requirements.
For example, here is the information they list about Coca-Cola’s DSPP (ticker symbol KO):
Note only those businesses which use Computershare will be listed. Some companies offering DSPPs and DRIPs may not be listed, so, again, it’s still a good idea to check the company’s website directly.
It’s easy to understand that direct purchase plans were created as a way to help investors avoid the hefty fees that brokerages were charging. But in today’s age where many brokerages are digital and charge $0 per trade, you might wonder: Why do people still choose to buy stocks without a broker?
There are still plenty of valid reasons why someone would want to use a DSPP or DRIP to buy stocks. Here are a few to consider.
Since most direct purchase plans are automated, the process is seamless for the stockholder. They can essentially sign a contract and then “set it and forget it” while their portfolio grows each month.
While most discount brokerages have $0 commissions, some traditional financial institutions are still charging fees for each trade. For anyone who insists on sticking with these providers, the fees of a direct purchase plan will be much lower by comparison.
Until recently, most brokerages only allowed investors to buy whole shares of stock. For a company like Amazon (ticker symbol: AMZN) where the price is approximately $3,000 per share, that can be a problem. DSPPs and DRIPs, on the other hand, generally let their participants buy fractional shares making the stocks of some companies more assessable.
Occasionally, some companies may choose to offer their direct sale participants the chance to buy shares at a discounted price. These may be deals that are not available to the general public.
Those investors who want to buy directly from a company usually do so because they believe in that brand. This gives the company the chance to get to know its participants better and share more insight with them about their plans for the future.
While participating in direct sales can be convenient, it does require some commitment and even risk on the part of the investor. Here are a few of the important points that every participant should be aware of.
When stocks are purchased directly from a company, trading them won’t be as easy as clicking a button. Transfers can take time, and depending on the urgency to cash them out this may pose a challenge for some investors. If it’s necessary to transfer them to a broker, then there may be unplanned fees involved too.
Because direct sale participants are locked into continuously buying the stock of just one company, this can cause their portfolio to become too heavily weighted in just that asset. If the company’s share price drops, it’s going to drag the whole portfolio down with it. According to modern portfolio theory, diversification is generally the most efficient way for an investor to minimize risk while achieving their desired optimal return rate.
Since stock purchases happen automatically, it's not known ahead of time what share price the purchase will be. This can be problematic, especially for investors who prefer to use a strategy of waiting until a share price is depressed (such as 10 percent below its recent peak) before buying more of the stock.
With the low cost and convenience of using an investing app, it's easier than ever for beginners to get into stock market trading. At its core, a trading app is still just a broker. This begs the question: Is it necessary for an investor to buy stocks without a broker through one of these direct purchase plans?
The answer is that it depends on your overall goals. If you want to dabble in buying a variety of different stocks and taking advantage of opportunities in the market, then a low-cost broker seems like a better fit. However, if you strongly believe in the merits of one company and want the chance to buy shares at a potential discount, then a direct purchase plan may be a good fit.
This is why it's important to be in the right mindset before you start investing, and that’s exactly what our Market Insiders program can do for you. The Market Insiders is a weekly coaching program where mentors who have real experience in the market can help you define and clarify what you want to accomplish. You’ll be able to ask questions and bounce ideas off of them which can save you the trouble of having to learn the hard way if your strategy doesn’t go the way you planned.
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Brokerages are an undeniable element in the stock buying process. They provide a necessary service of facilitating the orders of individual investors with the major stock exchanges. However, not all company shares necessarily have to be purchased through a broker.
The two best-known ways to buy stocks without a broker are using a DSPP and DRIP. Direct stock purchase plans allow individuals to buy shares directly from the issuing company. Dividend reinvestment plans enhance this concept by also giving investors the option to use their dividend payments to finance these stock purchases.
Anyone who wants to find businesses that have these direct purchase options can look for the Investor Relations page on the website of their desired company. Or another option is to search the database of a well-known stock transfer service like Computershare.
Investors may want to use a direct purchase plan because of the opportunity to buy shares at a discount, pay lower fees, and buy fractional shares. However, they should also understand that these plans make it harder to resell their shares and reduce portfolio diversification.
Whether an investor decides to use a broker or not will depend on their individual goals. There are many instances where these direct purchase plans can make sense. Ultimately, investors should seek the guidance of a mentor, determine what they wish to accomplish, and then go with the strategy that gives them the best chances of success.
