Stockbrokers were once the princes of Wall Street. Everybody needed them and their expertise to manage their investment decisions. And they did so, for a price of course.
But the investment business has changed dramatically over the last 30 years, and the professional stockbroker has seen their influence wane. Still, many potential investors may be nervous about entering the stock market without professional help. In this post, we’ll show you how to buy stocks online without a broker.
Buy Stock Without a Broker — Where’d They Go, Anyway?
Live, human stockbrokers still exist. Throughout most of the 20th century, they were a near-necessity for anyone who wanted to play the stock market. Most of the world’s good economic fortune (and a little of the bad) were driven by the stock professionals that advised clients on promising investments and executed transactions.
Then the 1990s happened, and a few things shook up the stockbroker community. One was the popularity of asset-based fee accounts for retail investors. Instead of charging customers to pay for brokers’ commissions, brokerage houses instituted a percentage fee based on how much stockholders had in their investment accounts (assets under management). Customers liked it, but stockbrokers themselves weren’t entirely thrilled with the arrangement.
The other big factor was — you probably saw this coming — the advent of the internet. In the late 90s, the marketplace for just about everything started to evolve to online transactions. Common investors were able to research, find, and purchase stocks without having to call up their reps at Merrill Lynch or Charles Schwab, although they still had to pay transaction fees. But the recent revolution of fee-free mobile investment apps has gotten rid of those fees across the board, for the most part.
Today’s stockbrokers generally serve extremely well-off clients or help companies make institutional stock investments. More common these days are financial advisors, who assist their clients in overall money management, including stocks and investments. But most of them have a fiduciary duty to put their clients first, which means they can’t operate out of their own interest. They can still charge commissions, but financial advisors are more about sustaining long-term, beneficial client relationships — so the pressure that comes along with earning commissions is effectively removed.
Now that retail investors command a bigger share of the market, the institutions that used to control stock market transactions are becoming less of a needed presence. But with more people jumping in on stocks now, some new investors may still feel a little nervous about doing so without a broker’s guiding hand. Here’s how to invest in stocks without a broker.
How to Buy Stocks Online Without a Broker: Open an Account
Even though you don’t need an actual stockbroker to invest in the stock market anymore, you do need some kind of transactional setup to do so.
The large majority of retail investors today have individual accounts with online brokerages — the same ones that used to employ human stockbrokers. We’re talking about Fidelity, TD Ameritrade, Merrill, Schwab, all those stars of yesteryear. We’re also talking about brokerage companies who began or thrived alongside the rise of e-trading, like Robinhood, E*TRADE, Acorns, and all the smartphone apps.
Opening an online brokerage account is almost laughably simple. Most brokerages won’t charge any fees or require a minimum balance to get started. Of course, when you want to start making trades, you have to put funds in the account first. Most brokerages make it easy to transfer directly from your debit, checking, or savings account into your investment account, although it may take a couple of days for the transaction to go through.
Once it does, these online brokerages make it fairly convenient to research stocks you’re interested in and make transactions. Most of the best ones offer full-on tutorials about investing and other money management concerns that may come up. This is all education that most everyday investors couldn’t get in the 20th century without a stockbroker or financial advisor.
How to Buy Stocks Online Without a Broker: Direct Stock Purchase Plans
Most retail investors still use online brokers because it’s easier. Companies sell stock to the online brokers, who make them available for purchase by anybody who clicks on the ticker. But is it possible to cut out the middleman altogether and buy directly from the company? Believe it or not, it is.
Certain companies allow direct stock purchase plans (DSPP). In this setup, personal investors send their money directly to the corporation and get shares in return, without anybody interceding on their behalf.
Not all companies offer DSSPs, but some that do are very familiar names: Starbucks, Walmart, Coca-Cola, Intel, Home Depot, Pfizer, and Campbell Soup, just to name a few. Most companies that offer DSPPs are ones at that level: hugely successful and stable companies that have been around and are going to stay awhile.
Technically, there is a go-between in a DSPP called a transfer agent. They function as an intermediary between the company and its direct investors, much like a brokerage does with traditional stocks. Computershare is one of the more popular transfer agents that corporations use to manage their DSPPs.
DSPPs have some advantages. The most pertinent one is cost savings. Investors save money on brokerage fees, and the companies issuing the stocks often offer discounts and to direct investors. They may also pay out dividends with no intermediary. It also encourages a more one-on-one relationship between investors and companies, which many businesses favor.
There are some potential drawbacks to DSPPs, however. Although the per-share price is often discounted, some companies have minimum investment requirements — you’ll have to buy at least a certain, predetermined number of shares, or start at a minimum total cash value. And the company may charge its own transaction and account setup fees.
One reason DSPPs aren’t necessarily as favorable as they once were is that online brokerages have made it easy and largely free to conduct transactions. Avoiding transaction fees was one big reason DSPPs were invented in the first place, and that’s largely irrelevant now.
Furthermore, with a DSPP, you’ll only be making transactions on the company you’re investing in. You can’t buy Starbucks stock from Coca-Cola, only Coke stock — and probably a minimum amount at that. Tying up a substantial amount of resources into a single company can reduce portfolio diversity, which is a very key aspect of successful stock investing.
Still, DSPPs are fine options for retail investors who are interested in owning long-term shares with a big company that they know will continue to be profitable.
How to Buy Stocks Online Without a Broker: Dividend Reinvestment Plans
Dividend reinvestment plans — DRiPs for short, and watch that lower-case “i” — are just like DSPPs in a lot of ways. Many companies that have a DSPP also offer DRiPs as ways for investors to add to their holdings effortlessly and inexpensively in the company.
It works like this: Companies that pay out quarterly dividends to stockholders generally offer two choices for what investors can do with their returns. They can issue them as cash payouts and deposit the dividend earnings into investors’ accounts, or they can take the dividend and use it to reinvest in the company.
This is a common option with most brokerages, and it works exactly the same with direct investments. The company retains the dividend payout and issues the investor additional stock shares worth the amount of the dividend.
That usually means investors will get some fractional shares. If a company issues a dividend of $100 on a stock with a current price of $80, the investor who chooses to reinvest their dividend will receive 1.25 shares in return (100 ÷ 80 = 1.25).
DRiPs are similar in structure to interest-bearing savings accounts. You automatically earn stock positions compounded every quarter, much like your savings account earns interest in line with current bank rates. The only real drawback to DRiPS — besides their being even less common than DSPPs — is that the dividend is taxable, as all dividends are. But it’s a great way to increase your position in a trusted company over time.
How to Buy Stocks Without a Broker: Do Your Homework
Retail investing is largely an independent activity these days, whether you use an online broker or eschew brokerages altogether. But whatever route you choose, remember that the burden for researching and analyzing a stock is on you.
The main advantage of having a stockbroker or financial advisor is their insider experience and know-how. All that knowledge is much more accessible these days, of course, but many investors still fly a little blind and don’t do all the due diligence they should. Take time to study your investment options, including full background and research on the companies you’re interested in before you go it alone.
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