An online brokerage firm allows people to buy and sell stocks on creating a brokerage account with the firm. In the US, it is regulated by the Securities and Exchange Commission (SEC). Brokerage firms can be full service or discount brokerage firms. Full service brokerage firms provide a wide range of services such as buying and selling stocks, providing research reports and online stock trading tips, helping people plan for their retirement, and providing tax saving tips. A discount brokerage firm, on the other hand, does not provide investment advice but allows clients to trade online. Both discount and full service brokerage firms charge a fee for the services rendered. Since full service types provide a wide range of services, the fee is proportionately higher. A person, who does not desire investment advice but intends to purchase shares, can avoid paying commissions by purchasing stocks directly from the company. Here are some direct investments plans you can consider.
Direct Stock Purchase Plan
Direct Stock Purchase Plan (DSP) is regulated by the SEC. Investors can purchase stocks directly from the company issuing the shares, thus eliminating the need for a broker. The company may charge a small fee in order to set up a stock purchase account, but the investor does not have to pay any commission. The fee, that is required to set up a stock purchase account, can be waived if one agrees to allow the company to automatically debit one’s checking or savings account on a monthly basis for the purpose of buying stocks. Although DSP is useful to investors desirous of acquiring a limited number of shares in a company, a person interested in investing a lump sum is not barred from participating in a DSP. This method of acquiring a stake is known as dollar cost averaging. The main advantage of this method is that a person is protected from unfavorable price movements in the stock market, by spreading out the risk. A person does not have to be a shareholder in order to enroll in a DSP plan. However, DSP is not offered by all publicly traded companies and it is one of the disadvantages of this plan.
Dividend Reinvestment Plan
Dividend Reinvestment Plan (DRIP) allows a shareholder to reinvest the dividend in the company. This is done by entering into an agreement allowing the company to allocate shares to the shareholder, equivalent to the amount of cash dividend and capital gains. Hence, a person has the option of buying a fraction of the company’s share. OCP or optional cash payment, allows the shareholder to invest additional cash, to acquire more shares in the company, without having to pay commissions. However, there are limits on additional cash payment. The main difference between a DRIP and a DSP is as follows: In the case of the latter, the first share is purchased directly from the company whereas in case of DRIP, the first share has to be bought from a broker. No commission has to be paid on subsequent purchases made by the firm on behalf of the investor using cash dividends. The main disadvantage of this plan is that, the investor has no control over when the company purchases shares using dividends. Although the plan ensures that maximum number of shares are purchased at the current market price, it’s possible that shares may be bought at a higher price when the investor does not particularly favor the investment. DRIP is good for people who have a long-term investment horizon.
Both DSP and DRIP result in zero commission on purchase of shares, and enable the investor to reap the benefits of dollar cost averaging. However, they do not allow the investor to buy at a short notice in order to take advantage of a fall in the price of the share. Moreover, substantial paperwork is involved in buying stocks without a broker.