When it comes to stocks, you can invest via either of the following two methods:
- through a brokerage account or
- through a direct stock purchase plan from a company.
Let’s look at both is a bit of detail.
Buy stocks through a broker
Before discount brokers and commission-free trading – or even, digitalization – working with brokers was the privilege of the well-off. You probably remember all those movies where people are shouting in their phones in packed offices, swearing, and sweating.
Of course, in movies, this is overdramatized, but the core workflow was close to what was represented in Hollywood. You had to call up a representative, who would connect you to a seller or buyer. This has changed dramatically with the rapid expansion of digitalization and the internet. Today connecting a buyer to a seller is done digitally, by computers and algorithms.
The past decade has been about online brokers. However, choosing a suitable online broker is not an easy task. It is really hard to navigate between all the options without proper expertise.
Definition of brokers
In the world of trading, a broker is someone who connects active traders (e.g. a seller with a buyer) and organizes the trade for a commission. Generally, when we talk about brokers, we mean the ones working close to famous trading floors, like NYSE, NASDAQ and LSE.
For retail traders, it is really difficult to gain access to a trading floor. It is costly, complex, and requires expertise. Only experts and major brokerage firms meet the requirements.
What exactly are these requirements? For example, a seat on the NYSE trading floor costs between $4,000 – $10,000 which is way out of reach for retailers to access.
Also, you’d need a license to act as a broker-dealer from the Financial Industry Regulatory Authority (FINRA) in the US to have access to these markets.
So brokerages – especially online brokerages – act as intermediariesthat connect trading floors and retailer investors.
They have access to the trading floors around the globe and they let you trade on these exchanges for a certain fee. They’ll forward your order request to the exchange and grant you access to the product you wish to buy or sell.
Given the continuous expansion of digitalization, an online broker could be an inexpensive alternative for someone who wants to trade and invest in stocks, forex, bonds, mutual funds or other products.
How to buy stocks without a broker?
Often, the simplest method of buying stocks without a broker is through a company’s direct stock purchase plan (DSPP). Trought DSPP as an individual investor you have the opportunity to purchase stocks from a company. Not all companies offer DSPP.
Where can I buy stocks without a broker?
Companies that offer DSPPs usually cite information about the plans on their websites, under the investor relations, shareholder services, or frequently asked questions (FAQ) sections. Here, you will find details about account minimums, investment minimums, any fees applicable to their offerings, trading details, and the like.
Advantages of Direct Stock Purchase Plan
The main advantage of buying directly from a company rather than a broker is that these plans often have very low fees (and sometimes no fees), which makes DSPPs an inexpensive way for first-time investors to enter the financial markets.
Disadvantages of Direct Stock Purchase Plan
An investor with a brokerage account and an investor with a direct stock plan could buy the same “company” stock at the same price, but the investor with the brokerage account could also acquire any other securities by the brokerage services.
In the past, direct plans were commission-free or low-commission trades, but this benefit has mostly vanished.
It’s now just as cheap to get stock through one of these commission-free brokerages as it would be to buy through direct plans. In some cases, using a commission-free brokerage might be even cheaper.
DSPPs can also impede your ability to time trades. Cashing out your position isn’t as simple as tapping a few buttons on an app. That is fine if you plan to buy and hold your stocks for decades, but a trading strategy like day trading (daily buying and selling stock) makes it nearly impossible.
If you trade often and enjoy regularly rebalancing your portfolio, on the other hand, you might be frustrated by the limitations.
