A lot of corporations are now “bypassing” brokers in the sense that they are offering stocks directly to the investors—the buying public. Those who approve of Direct-Stock Purchase Programs (DSPP) cite the low commissions that this form of stock-buying offers. Some companies also tout low or no initial deposits for as long as the investor commits to buying a certain amount of stock every month.
The problem is that while commissions are low, there are other fees that go along with it that can often equal how much you would spend if you had bought it from a broker. Sometimes, it can even exceed it. There are enrollment fees and fees for subsequent purchases. You also pay a fee if you want to sell your shares.
Then there’s the voluminous paper work that you have to go through if you want to apply DSPPs in various companies. You have to fill out each form separately and study the statements that each company will send to you. Finally, there’s that matter of diversification. You only have so much time and energy to study the different companies that you want to invest in so the chances are that you will be buying large numbers of stocks from a single company or few companies which will put your portfolio at risk in case things get rocky with these corporations.
Advantages and Disadvantages of Buying Stocks through a Broker
The other way to buy stocks is by setting up an account with a brokerage firm. Investors who are looking to save a few bucks shun brokers because of the fees to set up an account and the commissions that go along with it. However, if you look at the convenience and comprehensive service that these brokers give, you will find that you gain more when you get their services.
Before we explain further, it’s important to understand that there are two types of brokers—the full service brokers and the discount brokers. Full service brokers are those that go the whole nine yards when it comes to giving service to their clients. That is, they provide research and give advice on retirement planning, tax tips, and where to invest your stocks. The problem with full service brokers is that sometimes, their advice can be biased in favor of the companies they do business with. So if you want to just trade and do the researching on your own then you can go with the second type of broker—the discount broker.
Discount brokers are those that carry out buy and sell stock orders but do not give investment advice. Because they do not provide investment advice, they charge only small commissions. One of the advantages of going with a discount broker is that they give different avenues for investing—through the Internet, phone, or fax. They also give you access to a wide variety of investment options which help you diversify your stock portfolio. Most brokers also centralize purchasing and holding of stocks and consolidated tax-reporting which simplifies all the paper work for you.
When placing orders through a broker, just remember to buy larger shares so you can save on the commissions. At the very least, you can start with a hundred shares. In case this is not possible, it’s generally wiser to save for it first before buying the big chunk rather than buying a small number of shares at a time.
Finally, when it comes to putting your order with your broker, it is best to begin with market orders. You may have heard of limit orders but this form of stock-buying is best reserved for those who already have enough experience with the stock market. A market order is when you tell your broker to buy a number of shares of stock of a particular company at its current price. This is the most common method of buying stock.
When you place a limit order with your broker, you’re essentially telling him to buy a number of shares when the price reaches a particular amount or better. This kind of order is good until you cancel it and is usually used for highly-volatile or low-volume stocks. Again, if you are a neophyte in the world of stocks, it’s best to leave limit orders and stick with market orders.
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