How to buy stock directly?
Buying stocks in individual companies is one of the most traditional ways to invest money in the stock market. There may be a few circumstances in which a person may want to buy stocks directly from a company. These may include factors such as high brokerage costs, and many new investors look to buy stocks without a broker. This is referred to as direct investment.
How to buy stock directly – types of shares
There are two types of company shares:
Ordinary shares: Buying shares in a company makes the investors part-owner of the company. Investors or shareholders receive a ‘share’ in the profits of a company. However, the value of these shares may vary, depending on a number of factors such as the growth in the company’s business, its internal management and external ones such as demand, the overall economic climate, nationally or internationally. Therefore, it is necessary to stay updated on the latest news on the company in which you are a shareholder as well as the overall economic conditions at any given time.
Most ordinary shares are voting shares, which means investors can have a say on matters relating to the company, such as director’s fees or whether to agree to a takeover.
The risk associated with ordinary shares is that there is no guarantee that investors will receive any share of the profits. In case the company winds up, holders of ordinary shares are the last to receive repayments for their investment.
Preference shares: These shares carry no voting rights, but holders of preference shares are entitled to other rights. As the name suggests, preference shareholders usually get a share of the profits before ordinary shareholders, which is usually a limited amount defined by the issuing company. Apart from this, preference shareholders are paid prior to ordinary shareholders in case the company winds up. Preference shares are perceived as less risky compared with ordinary shares, so the repayments are usually less than that for ordinary shares.
Return from shares
The return from shares is in two forms: Dividends and Capital growth.
Dividends: A company distributes part of its profits to its shareholders in the form of dividends, which is usually a biannual payment. Dividend payments are usually made by larger, long-established companies, and the dividend payout may be larger, depending on the profits booked by the company. Smaller companies are less likely to pay out a dividend to their shareholders as they may use the profit for business growth. However, the value of shares in such a small company may rise over time as its business grows, so shareholders in such a small company may benefit from the growth in the business of such a company and receive dividends in the future.
Capital growth: Shareholders can earn a profit if the selling price of their shares is higher than the buying price. This is a rise or capital growth on the initial investment. A rise in share prices of a company may be expected if the company is performing well and is expected to continue to do so in the future. The financial results of a company which a company publishes every six months as well as trading updates and announcements of dividend distributions for the future are strong indicators in term of performance of a company in the future. As opposed to this, share prices can fall if the company forecasts are not positive.
Taxes on shares
Investors are taxed on any returns made on shares. The returns may be either through dividends or capital growth. Buying within a stocks and shares Isa is a popular way of investing in shares in a tax-efficient manner. This allows for 7.5% tax benefits on anything beyond the £5,000 tax-free dividend allowance.
Companies list their shares on a stock exchange to make it easy for investors to buy their shares as it is a ready-made market to trade shares. Smaller companies are usually not listed but they are traded on the Alternative Investment Market or the AIM. Investment in these companies are usually considered to be more risky compared with those listed on the stock exchange.
How to buy stock directly or without a broker?
Once companies list on a stock exchange, they employ transfer agents to administer share transactions for them. A direct stock purchase plan allows investors to buy shares in a company through its transfer agent instead of buying through a broker. This is beneficial for the investor as the purchase plan removes the broker and, therefore, the brokerage involved in the process. Though not all companies listed on the stock exchange offer this plan, a number of major companies provide this opportunity to their investors, giving a wide range of choice to investors.
Ways to buy shares directly
Direct Stock Purchase Plan (DSPP)
Several well-known companies sell stocks directly to individual investors, without involving brokers in the process as the transaction between the company and the investor is completed directly. Buying stocks directly or without a broker involves participation in a company’s direct stock purchase plan. Most of the companies which offer the direct stock purchase plan to investors, do not charge investors a commission. However, in case the DSPP offered by a company does involve a commission or service charges, it may be much lower than that usually charged by brokers in return for providing share trading services to clients. The direct stock purchase plan is especially useful to investors looking to buy a very small number of shares and minimise the costs.
Dividend Reinvestment Plans (DRIP)
Investors who own shares in a company with a dividend reinvestment plan may register with the company and participate in the plan. Under this plan, the dividends due to DRIP participants, goes directly towards buying more stocks in the company instead of the payout going to the shareholder. As with direct stock purchase, the dividend reinvestment plans usually do not involve any commission charges, as well.
Employee Stock Purchase Plans (ESPP)
This plan provides a great opportunity to employees of public companies to buy the company’s stocks at a discount (usually 85% of the value). However, employees are offered a limited number of shares. These stocks can go directly into a retirement fund.