But you don’t have $1,000+ dollars to spend hiring a broker.
Don’t worry, you’re not the only one. For stock market newbies, brokerage fees can come as quite a shock. Taken as either a percentage of the transaction or a flat fee, brokerage fees are the bulk of what you will be paying if you choose to invest through a broker.
Investopedia gives two examples of a typical brokerage fee:
-Stock Price Over $2:$28 flat rate up to 999 shares, 3 cents per share over 999 shares.
-Stock Price $2 and Under:4% of principal trade with a minimum of $28 charged.
It might not seem like a lot at first, but all of that extra cash you’re spending could be invested in buying more stock instead of paying a down payment on your broker’s yacht. Thankfully, there’s an easier (and cheaper) option: Direct Stock Purchase Plans.
What Are They?
In a nutshell, DSPPs are a way for you to buy stock in a company without the assistance of a broker. It’s a great alternative for millennials looking to get started in the market because DSPPs allow you to buy a set number of shares of one particular company (or more, if you so choose). Using this method you can test the waters as a new investor without spreading yourself too thin.
Unlike buying through a broker, where you buy X amount of shares as a one-time deal, DSPPs try to convince you to buy X amount of shares each month by waiving other fees since the company is the one doing the selling.
How Does it Work?
Not all companies give you the option to buy with a DSPP. The first step to buying a stock with DSPP is to look up the website for your desired company and look under its “investors” page. There should be something in the FAQ section that references buying stock directly. If the company offers a DSPP, there will be a link that will take you to the company’s stock transfer agent.
The link will give you further information regarding minimum purchase requirements and the monthly minimum investment amount. If you like what you see, follow the company’s instructions for opening an account. Make sure you have your SSN, bank account information and your chosen monthly withdrawal amount on hand.
Congratulations, you are now a shareholder.
What’s the Catch?
While DSPPs are an inexpensive way to get started as an investor, they aren’t fool proof.
The goal of the DSPP is to keep increasing your shares in one company, which could spell trouble down the line if the company eventually takes a turn for the worse. No stock is impenetrable to the wear and tear of the stock market, but if you’re going to start out with DSPPs consider investing in blue-chip companies. These companies typically weather economic storms without taking too much of a battering.
DSPPs can also hold you back from diversifying your portfolio in the long run. Opening up DSPPs with multiple companies can get clunky; eventually, you will have to consider making the jump to brokerage for convenience purposes if you truly want to diversify your portfolio.
Have you ever invested with a DSPP? If not, would you consider using one in the future? Let us know in the comments, or hit us up on Facebook.