Shares of stock represent ownership in the issuing company. This allows you to participate in the growth and profits earned by the company. Shares are usually traded in lots of 100 shares, but it is possible to buy or sell fewer stocks as an odd lot, that is, in fewer than 100 shares. Stocks typically trade in whole shares, but you can gain ownership of fractional shares of some stocks by investing in a company's direct investment plan.
Traditional Stock Purchases
Most stock trade transactions are facilitated by an investments broker. When you buy stocks through a broker you can determine the price per share you are willing to pay and the number of whole shares of stock you wish to buy. Your broker will enter your order and if a seller is found who is willing to sell at the price you are willing to pay, the trade is made immediately. You will typically pay a commission for each trade.
Direct Investment Plans
Some companies offer investors the opportunity to purchase shares of their stock directly, without the use of an investments broker, through a direct investment plan. Instead of purchasing a specific number of shares of stock, you will deposit a specific amount of money into your direct investment plan account. The plan's administrator will pool your deposit with the funds of all other investors in the plan and use those funds to periodically purchase company stock. Each investor will receive a pro rata number of shares of stock, which may include fractional shares.
Different companies have different requirements for participation in their direct investment plans. Some may only allow company employees to participate. Some only offer the service to investors who already own stock in the company. Some companies make their direct investment plans available to everyone. Direct investment plans may require a minimum initial investment. Some plans allow you to reinvest your dividends into additional shares of company stock, which may result in fractional shares.
Pros and Cons
You have no control over the price that is paid for stock purchased in a direct investment plan. As with any stock purchase, there is no guarantee that the value of your stock will increase or that the stock will pay dividends, even if the company has a long history of dividend payments. Past performance is never a guarantee of future results. The plan administrator typically covers any commission charged for purchasing stock in a direct investment plan, so more of your money goes toward purchasing stock than if you made the purchase through an investments broker.
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