Advantages & Disadvantages of Stocks Directly From The Company Vs. a Broker

by Vicki A. Benge

Purchasing shares of stock directly from the company has been shown to have both advantages and disadvantages compared to buying through a broker. Consideration should be given to the time involved, associated costs, available selection, and how shares are redeemed or traded using a broker as compared with buying direct. Objectively comparing the two means of purchasing stock can help the investor decide what works best for individual preferences.

Time

The investor should decide how much time they are willing to spend in building a portfolio. A broker handles orders without stockholders having to put forth much effort. An advantage of purchasing through a broker is that not as much research is involved with a full-service brokerage that offers advice on choices based on the investor's goals and risk toleration. When buying stock directly from the company, the individual investor will need to gather the research required to decide which stocks to purchase.

Dollar Cost Averaging

Many companies that offer stock for direct purchase also offer dividend reinvestment plans, known as DRIPs. Purchasing stock of a company through a DRIP gives the investor the advantage of purchasing partial shares at no additional cost. Companies that offer DRIPs often allow individuals to invest a set amount monthly, taking advantage of what investors call dollar cost averaging, a process of making regularly scheduled investments. Dollar cost averaging has been shown to reduce total cost of investing in stocks over the long-term, because more shares are purchased when prices are lower.

Costs

Discount brokers charge commissions on both purchases and sales of stock shares. Some companies that offer stock directly to private investors pay or waive purchase fees. The minimum investment for direct purchase can be as little as one share under a company direct plan. Buying one share of stock through a broker can produce a significant loss upfront. Consider, for example, a stock selling at $25 per share. If an investor buys only one share through a broker and the commission charged is $10, the upfront loss would be 40 percent. Then suppose the investor decided to sell the share and paid an additional $10 to the broker. The payout on commission would create a 80 percent loss.

Turnover and Selection

An established broker can sell shares immediately at the current market price during regular trading hours. Access to immediate transactions allows investors to take advantage of an opportunity that can quickly disappear as stock prices change. The disadvantage of buying direct from a company is that redemption of shares cannot happen as quickly, and can take several days. However, not all public companies offer shares of stock for sale directly to private investors. A broker, on the other hand, may offer access to almost all publicly traded stocks worldwide.

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