So you've put aside some money and are ready to begin trading, or buying and selling stocks in the markets. No doubt you want to keep as much of your profits as possible without having to fork over a percentage of that money to an outsider -- like a stock broker. You can readily trade stocks online to achieve some cost savings, but you might not bypass fees altogether.
A dividend reinvestment program is one in which you cut out a middle man and purchase a stock directly from a company. You must first decide which stock you want to buy. Then, go to the investor relations page on a company's website to see if it offers a DRIP, or visit the DRIP Investor website, which has a database of these companies. DRIP features are automated, which means your dividends are automatically reinvested back into the company on your behalf -- and you can set up online money transfers from your bank to your DRIP account. Setting up automatic, online transfers can work to your advantage because as a result of doing so, many DRIPs won't charge you any commission costs. Some DRIPS, however, require that you own at least one share of the stock before you can participate, which means you may have to pay an average of $10 -- possibly less -- in initial brokerage fees before transferring your share to a DRIP.
Your best chance of buying a stock and not paying any fees is to invest via a direct purchase plan. These are offered by companies that let you invest directly without the use of a broker. Once again, you can check the investor relations page of a company's website to learn if a DPP is offered, or use the database on the Computershare website. Despite the similarities, DPPs differ from DRIPs in that you don't need to have a previous investment in the stock to participate, which means you won't pay any brokerage fees. You can generally expect to open an account online -- and once you do, the company won't charge you for buying shares. However, you might find that DPPs carry investment minimums, which could range from buying a single share of stock to investing $1,000 or so upfront.
Each company's policy is likely to differ, but when it comes time to sell stock in a DRIP or DPP, you can, in some instances, expect to pay commission fees. However, those fees, which can be as low as $0.05 per share, are lower than what online stock brokers charge. Also, according to the DRIP Investor website, some companies don't charge any commission fees whatsoever. Depending on the type of account you have, you might be able to sell a DRIP or DPP online, but in other cases, you'll need to pick up the phone and call a transfer agent, which is a third-party representative that maintains company records.
Two of the primary disadvantages of investing in a DRIP or DPP are paperwork and taxes. If you invest in multiple companies, you're going to receive account statements from all of them, which could amount to lots of mail or emails. If you sell stock, you're going to receive tax documents from each company that you're invested in while a stock broker would condense the information. Another disadvantage that applies specifically to dividend-paying investments is that you'll have to pay taxes on those distributions each year even if you don't see the cash that is automatically reinvested for you in a DRIP.
- USA Today: Investors Can Avoid Common Fees from Online Brokerages
- Duke Energy: Shareholder FAQs
- General Mills: Direct Stock Purchase Plan
- Money Morning: DRIPs -- How to Invest in Dividend Reinvestment Plans
- The Wall Street Journal: How to Buy a Stock
- Forbes: How to Invest Using Direct Stock Purchase Plans
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.