Buying Stocks without a Broker

To buy stocks, you’ll typically need the assistance of a stockbroker, since you cannot simply call up a stock exchange and ask to buy stocks directly. While many investors choose to buy and sell investments through a brokerage account, you may wonder how you can do so without a broker. DIY investors have several options for buying stocks without brokers online. Here’s a closer look at how each one works.

Investing through Direct Stock Purchase Plans (DSPPs)

A Direct Stock Purchase Plan (DSPP) allows individual investors to buy stock directly from a company. Specifically, trades are completed through a transfer agent.That means you could buy stocks without a broker, full-service or online, to complete the transaction.

The main benefit of DSPPs is they allow an investor to invest a set amount on some kind of recurring basis—sort of a “set it and forget it” strategy. This strategy allows investors to ignore the short-term market and invest in companies over the long-term. It works because the market historically has shown strong returns over the long-term. Depending on the company a person invests in, they might be offered a slight discount, between 1% and 10%, for investing directly.

However, as online brokerages have gained in popularity and gotten cheaper, the benefits of DSPPs have faded. Relying entirely on DSPPs makes it harder to diversify your portfolio—an absolute necessity if you want to insulate yourself from risk. For that reason, they’re typically considered more appropriate for a long term investment.

DSPPs are generally available from large, well-established companies. Large, publicly-traded corporations often have DSPP programs. Consult informative websites such as Computershare to get a complete alphabetical list of companies that offer DSPPs. Go to the investor’s page of the company’s website. Look through the FAQs to find a link to information about DSPPs. This link will take you to the company’s transfer agent.

Once you own shares of stock in a company, you have two choices. You can have the monthly dividends sent directly to you or you can choose to reinvest them to purchase additional stock. The latter option is known as a Dividend Reinvestment Plan, or DRIP.

Investing through Dividend Reinvestment Plans (DRiPs)

Dividend Reinvestment Plans (DRiPs), share many similarities to DSPPs—in fact, some DSPPs offer DRiP programs. The main feature of DRIPs is that they let you reinvest any income generated from stock dividends to buy more shares. Reinvesting dividends is not dissimilar to compound interest. Warren Buffet, the so-called “Oracle of Omaha” and CEO of Berkshire-Hathaway, has accrued much of his vast fortune by investing in companies that produce good long-term dividends and reinvesting those funds.

The main advantage of buying directly from a company rather than a broker is how simple it all is. Direct stock plans also allow for better communication between the company and its investors. If you're an institutional investor, you may have access to extra benefits through direct stock purchase plans. Special "waiver discounts" could allow you to buy shares at a discount that isn't made public.

One major drawback of DRIP accounts is that it’s hard to quickly sell-off and liquidate your stock assets. In some cases, this can be a good thing as it might prevent you from making rash investment decisions.

Investing through Direct Registration System (DRS)

DSPPs and DRIPs are probably the most common direct stock buying schemes, but there are several other specialty accounts usually available to others who have a lot of wealth. For example, a Direct Registration System (DRS) allows investors to have securities directly registered with the issuer’s records.

Basically, Direct Registration Systems work through a brokerage, but the stock is registered under the individual investor’s name, not the brokerage firm. DRSs insulate investors from brokerage risks and give direct correspondence with the company itself. Also, DRSs make it easier to use other stock buying plans like DSPPs and DRIPs.

Using an Online Brokerage Account

One alternative to both DSPPs and DRiPs is an online brokerage account. These are the accounts you’d normally open with a financial institution and, just like traditional brokerage accounts, are available on many online trading platforms that are suitable for both investment novices as well as veterans. Online brokerage accounts have slowly been replacing traditional methods of direct investment by providing everything you need to trade in a convenient user interface.

One of the biggest draws of online brokerage accounts is the low cost. Discount and online brokers, such as eToro, Robinhood, TD Ameritrade and E-Trade, charge small commissions, but they do not offer investment advice. They are a good option for self-directed investors who want to do their own research and not rely on the advice of a broker. Full service brokers, such as Merrill Lynch, Salomon Smith Barney, Morgan Stanley and Dean Witter, offer personal advice, retirement planning, tax tips and a wide selection of investment products; however, they charge usually charge hefty fees for personal advice.

Final thought

Identify your risk tolerance will help you choose the right investment tools for you. Ask yourself about the amount of time you have to invest, psychological comfort with the potential of loss, your future earning capacity, and the value of your other assets. If you have many years to let your investments grow, then you may be able to withstand a few bad years of losing money on investments. Also, if your other assets are highly valuable, then you may feel more comfortable with high-risk investments.

No matter which option you choose, it always helps to learn about the financial basics of the stock market. There are tons of free online resources on how to buy and sell stock that you can peruse at your own leisure.