What's The Best Way to Buy Stock?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A recent article in USA Today caught my eye as a "small investor" asked a question about buying stock directly from certain companies. Since this is exactly the way I got started in the stock market myself, I was curious to see what the authors response might be. In short, he suggested that free accounts with no minimums at, "many online brokerages" were the way to go. He even went as far as to say that, "some deep discount firms allow investors to buy and sell for $5 or less.” His concern about buying stock directly from the company, was the fact that these plans have gotten more expensive. While I agree in part with this answer, the best way to buy a stock depends on the company and on what the investor needs on an ongoing basis. Let me walk you through a few alternatives, and explain which one might fit a small investor or someone who is unfamiliar with brokerage accounts.
Buying Stock Direct (Dividend Reinvestment Plans - DRIPs):
One example given in the above-mentioned USA Today article was The Walt Disney Co. (NYSE: DIS) as a company where small investors might be better off going with a discount broker. The company's terms of its direct stock purchase plan are fairly standard. There is a one-time enrollment fee of $10, you have to invest at least $50 at a time, and your commission depends on if it's a one time or a recurring investment. Investors making a single investment pay $5 in commission, versus someone with a recurring automatic investment pays a commission of just $1. The article also mentioned that to sell the stock there was a $10 sale fee. To say this plan is less attractive than dealing with a discount broker depends a lot on if the investor is planning a single purchase, or ongoing recurring purchases. In addition, not all plans are created the same. Some companies charge no fee for purchases at all, and yet others charge a fee even to reinvest dividends. Take a look at a few different companies that allow stock purchases directly and you'll see the huge difference in fee structure depending on which company:
(Information from Computershare for the above plans can be found here)
As you can see, a small investor theoretically could set up four different accounts with each of the above companies and be relatively diversified. With automatic investing, the individual would only need $400 total to get the accounts started. Their total cost upfront would be $20 worth of set up fees and their initial investment would cost $8 in commissions. While this sounds like a lot, keep in mind that from that point forward to buy stock in any of these companies on an automatic basis at most would cost $2.50 per purchase. However, if someone is looking to make a single investment, the difference in cost of buying direct or buying from a broker probably won't be a huge difference over time.
Buying Through a Discount Broker:
For investors looking to simplify their record keeping, a discount brokerage can be a good solution to put all of their stocks on one statement. Four of the more popular discount brokers are Scottrade, E*TRADE, TD Ameritrade, and Sharebuilder. Of these four different brokers, only Scottrade and E*TRADE require a $500 minimum to begin your account. When it comes to commissions, Scottrade charges a flat $7 fee per trade. The company does not currently offer dividend reinvestment, but plans on beginning this in 2013. The other three brokers all offer dividend reinvestment, but E*TRADE and TD Ameritrade both charge $9.99 for their standard commission.
Sharebuilder is the clear price leader, if investors are willing to buy shares only on Tuesdays and not using real-time trades. The company offers this automatic investing plan with two different price structures. Investors can buy an even dollar amount in most companies and pay just $4 for their commission. Investors looking to buy more companies at a cheaper price, can choose their Advantage plan for $12 per month and they received 12 of these automatic investments each month. In essence, an investor could buy 12 different stocks as an effective commission of $1 per trade. The only negative of this Advantage plan is, the investor pays this $12 no matter how many trades they make. If the individual makes no trades during the month they still pay this $12 fee. Each broker offers different advantages, but in many cases buying direct from the company is still cheaper.
The good news for small investors is, buying stock in multiple companies is no longer something that you need a lot of money to accomplish. Whether you choose to buy direct from the company, or to go through a discount broker, either way you can create a diversified portfolio at a relatively low cost.
MHenage owns shares of Verizon Communications. The Motley Fool owns shares of Walt Disney and ExxonMobil. Motley Fool newsletter services recommend The Coca-Cola Company and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.