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Buying Stocks and Mutual Funds without a Broker

5 of 6 in Series: The Essentials of Investing Online

Can you be an online investor without a broker? Sure. Some online investors want to buy stocks but don’t want to bother with a broker. There’s nothing that says you need to have a broker to buy and sell stocks or mutual funds.

Stocks: Direct investments

Direct investments are where you buy the stock straight from the company. Many large companies, such as Coca-Cola, Procter & Gamble (P&G), and Walt Disney, allow you to buy and sell your stock with them and avoid a broker. Many direct investment programs are connected with dividend reinvestment plans (DRIPs), where the companies let you use dividend payments to buy, or reinvest, additional shares.

If you’re interested in going with a direct investment program, you can visit the investor-relations section of the company’s Web site to see whether it offers one. P&G, for instance, has an elaborate Shareholder Investment Program that lets you buy as little as $250 in stock and will even reinvest the dividends.

The other way to find direct investment programs is through directory services, such as The Moneypaper’s Directinvesting.com.

Here are the upsides to direct investing:

  • Potential commission savings: The fees charged by direct investment programs can be lower than what some brokers charge. P&G, for instance, charges no fee for investments plus a 2-cents-per-share charge if you buy the stock using money from your bank account and just $2.50 plus 2 cents per share if you mail a check.

  • Dividend reinvestments: Dividends can be reinvested for free. If you’re with a broker, you would often need to incur a commission to reinvest a dividend into the company stock.

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As you might suspect, direct investing has some downsides:

  • Not free for all transactions: Some companies even charge commissions that exceed what deep discount brokerages charge for certain services. Be sure to check the company’s Web site, usually in a document called a direct stock plan prospectus, and understand all the fees that are charged.

  • Setup fees: Although opening a brokerage account is usually free, some direct investment plans charge a fee to get started. Some plans also have minimum initial deposits. P&G, for instance, requires $250 for a new account.

  • Limited universe: By using direct investment plans, you’re narrowing your universe of possible investments to the hundreds of the largely older, blue-chip companies that offer these programs.

  • Administrative hassles: With direct investment plans, you need to manage all your separate accounts, which could be a pain if you have ten or more investments.

Mutual funds: Straight from the mutual fund company

You can buy mutual funds with no transaction fee if you deal directly with the mutual fund company. This can be a tremendous advantage, especially if you’re making frequent and regular investments into a fund. After you figure out what fund you want to buy, log on to the mutual fund company’s Web site, open an account, and buy it. You’ll save yourself some cash.

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