How do I Buy Stocks Cheaply?

Traditional brokerage firms give you great service and investment research resources – for a price. If you’d rather put more money into buying stock and less into broker’s commissions, there are a couple of alternatives. With a direct stock purchase plan (DSPP) you can buy shares directly from a corporation’s transfer agent. That’s usually the cheapest way to buy a stock. If a company doesn’t offer a DSPP plan, you can find reliable discount houses. Bear in mind that you won’t receive the extensive research resources a full-service broker provides, so you must take the initiative to research your own investments.

Step 1

Look on the Investor Relations website of companies you are interested in. If the company has a direct stock purchase plan, it will be described there. Alternatively, you can browse lists of DSPPs published by transfer agents. For example, ComputerShare and the Bank of New York (Mellon) post lists online of companies with direct stock purchase plans they administer.

Step 2

Open a DSPP account with the transfer agent for the company you choose. Under Securities and Exchange Commission rules a transfer agent must administer the DSPP, not the company itself. In most cases you can download an application form the transfer agent website. Complete the form and mail it to the address provided.

Step 3

Choose the DSPP features you want. Most DSPPs require only $250 to $500 as an initial investment. Usually you can choose to have this initial investment automatically deducted from a bank account in $25 to $50 monthly installments. Most plans also offer free dividend reinvestment and stock certificate storage as options. You can set up the DSPP account as an IRA as well.

Step 4

Include a check or money order for start-up costs with your application when you mail it in. There’s usually a one-time $10 to $20 set-up fee (as of 2010), plus the initial investment if you don’t opt for automatic debiting. Make a note of transaction fees. Some companies pay these fees for you when you purchase their stock through a DSPP. If not, expect to pay $1 to $3 per transaction plus a few cents per share.

Step 5

Open an account with a discount broker who offers accounts designed for small investors. You can do this online with providers like ShareBuilder or Buy and Hold. These plans are a bit more costly than a DSPP, but a lot cheaper than regular brokers. You can buy and sell the stock of any publicly-traded company, not just those who have DSPPs. You also don’t have to have a separate account for each company. As of 2010, ShareBuilder offered plans with trades starting from $4 with no minimum balance or number of trades. Buy and Hold has a plan starting at $7 per month with two free trades per month plus $3 each for additional trades.

the nest