Do you want to buy stocks on your own to avoid paying high fees to a broker? Read on to learn the advantages and disadvantages.
Normally, you need to open a brokerage account to buy shares. However, with direct investments, you don’t need the services of a broker since you can buy them straight from the company selling them. You can do this with large multinationals and well-known brands such as Walt Disney, Proctor and Gamble, Coca Cola and others since they allow investors to buy shares without a broker.
Big companies offer their shares for sale via their own direct investment plans to investors who want to buy without involving a broker. They also offer dividend reinvestment plans or DRIPs where you can reinvest dividends to buy additional shares. You may want to consider this since companies offering such programs typically have very high growth potential. Hence, their shares can grow in value over time, and that can help expand your portfolio if you choose to reinvest dividends.
How to find whether a company is offering such programs? You can go over to the investor relations section of their website to read more about these programs. For example, at Proctor and Gamble, you can buy shares with just a $250 investment and then opt to reinvest dividends for buying more shares.
You should read the terms and conditions of each company carefully because there are differences between programs of various companies.
Advantages of Direct Investing
Here are some advantages of direct investing.
No Commissions
The most obvious benefit is that you do not have to pay commissions to any brokerage service since you buy shares directly without external assistance.
However, you must note that companies offering shares for direct purchase often charge a small fee. For example, Proctor and Gamble charge 2 cents per share if you buy their shares using your bank account.
Reinvest Dividends for Free
With brokers, you have to pay a fee to reinvest dividends for buying more shares. However, you can reinvest dividends to buy more shares for free with companies that offer direct investments in their shares.
However, you also need to be aware of the downsides of investing without a broker.
Small Fee
Although you do not have to pay as much, there is still a small fee. In fact, some companies may even charge more fees than what high-discount brokerage services charge. Hence, you have to look very carefully into the terms and fees so that you know exactly how much you will be paying. Reading the fine print carefully can help you understand whether the fees involved are worth avoiding the services of a broker.
Minimum Investment
You may have to invest a certain minimum amount when opening an investment account. For instance, at Proctor and Gamble, you have to commit at least $250 when you open a new account. Some accounts also charge a fee to open, although most are free.
Disadvantages of Direct Investing
Here are some disadvantages of direct investing.
Limited Choices
Not all companies offer direct investments. Such programs are associated with large global brands that have high growth potential. These brands often have a history of at least a few decades where they have expanded substantially across the country and worldwide. They often have a positive forecast for growth.
In other words, you are limited to blue-chip companies.
Self Administration
You will have to monitor and handle accounts on your own. That may not sound like much of a hassle if you have just one account. However, if you want a diversified portfolio for risk mitigation, following 10 or more accounts is not exactly convenient.
Mutual Funds
If you deal directly with companies dealing in mutual funds, you will not have to pay any transaction fee. This can be a massive advantage especially if you frequently invest in mutual funds.
All you have to do is find the fund that looks promising to you, log into the company’s site offering the mutual fund, open your account, and purchase it. You can save money this way.
You will now be aware that your range of choice is limited with direct investments. For most stocks, you will need an online account from a brokerage to buy them. However, you can minimize the transaction fees and costs if you choose the right service.
To keep transaction fees and costs down, you will have to consider discounts or online brokers. Such brokerages charge much smaller fees compared to traditional full-service brokers – the kind of brokers who offer tax advice, investment advice, financial advice and other services in addition to actively managing your investments.
Although online brokerages can be cheaper than traditional full-service brokers, their services are limited too. You won’t have a financial advisor to help you with tax, investment and other key matters that you will likely face.
With discount/online brokers, you will have to pay just a small fee for every transaction. The minimum investment amount is also not much, so just about anyone can open an account online without visiting a physical office.
Once you open an account, you can choose to buy and sell shares immediately.
However, you are on your own with these discount brokerages. You will not receive any financial advice on share investment or any other financial matter.
Bottom Line
Investing without a broker is easy. However, you will not want to commit all of your investment portfolios to direct investment. But if you do not have profound experience and knowledge about investment, you may want to visit a financial advisor or traditional full-service broker.
They do charge fees, but you can save a lot more by avoiding mistakes and making the best of available opportunities with their advice.
