How to Buy or Sell Stocks

One of the first things you’ll need to learn when you get into the world of investing is how to buy and sell shares of stock. There are several different methods for trading stocks, and each one has its advantages and disadvantages. Here are the mechanisms by which you can buy and sell stocks when you begin investing.

 

A direct stock purchase plan (DSPP) is a program that allows investors to purchase shares directly from the company that issues them.

 

This lets investors avoid brokers altogether and deal directly with publicly traded companies. DSPP programs typically come with very low fees and make it possible for investors to avoid broker commissions. In some cases, shares sold through a DSPP are offered at a discounted rate.

 

Generally, DSPPs allow investors to set up accounts that are automatically funded. From these accounts, the company will make periodic stock purchases. This system has the advantage of being simple, but it doesn’t allow investors to buy or sell stocks at specific prices. The frequency of new stock purchases will depend on the company and how it structures its plan.

 

DSPPs also make it easy to invest on a very small budget. Typically, the minimum amount you need to put into a DSPP account will be between $100 and $500. As new deposits are made, the company will continue to sell you new shares of stock. Over time, recurring deposits can allow you to build up a considerable number of shares in your chosen company.

 

It should be noted that not all DSPPs are open to the general public. In some cases, companies limit participation to their employees or existing shareholders. Many companies, however, let retail investors participate in their DSPPs.

 

A DSPP is arguably the simplest way to invest in a company’s stock. With this kind of program, you don’t have to worry about actively making purchases or analyzing prices before buying.

 

With that said, DSPPs also have their downsides. The main issue with these programs is their lack of diversification. A DSPP will only ever give you access to stock in a single company. You can, however, diversify your portfolio by participating in multiple DSPPs.

 

Dividend reinvestment plans (DRIPs) are plans in which dividend payments are made in new shares of stock instead of cash.

 

When a payment is made, the amount will be automatically rolled over into more shares of the stock. Over time, reinvesting dividends can boost your returns and ultimately create a larger stream of income when you’re ready to take your dividends in cash.

 

In many cases, DRIPs are part of DSPPs. If a company you purchase stock directly from pays a dividend, you’ll most likely have the option to have the dividend reinvested. Most companies will also give you the option to reinvest only a portion of your dividends. This makes it possible to boost overall performance within your portfolio through reinvestment while also getting some cash flow from your existing shares.

 

Although DRIPs were originally run by individual companies offering stocks, many brokerages today will automatically reinvest your dividends for you. This service is especially useful if your brokerage offers fractional shares.

 

With fractional shares and dividend reinvestment, you can keep more of your money working for you in the market without having to wait to purchase more full shares.

 

While purchasing stock directly from companies can be convenient, brokerages are still the main method for buying and selling stocks on the open market. With a brokerage, you can buy and sell shares in any publicly traded company. This makes it much easier to build a diversified portfolio since the same account can be used to buy shares in several companies.

 

When doing business with a broker, you’ll generally pay a fee for each of your trades. This fee is known as a commission. The commission structure, however, varies between different types of brokers.

 

The first type, known as a full-service broker, typically charges a percentage of assets under management, often as much as 1%. These brokers provide comprehensive management services, making your investment activity much simpler.

 

The second type of broker is known as a discount broker. These brokers don’t offer the kind of financial management services that full-service brokers do. However, their commissions are very small, allowing you to potentially save thousands of dollars each year in fees. Discount brokers also tend to have much lower minimum investment requirements than full-service brokers.

 

In some cases, you can find online brokers that don’t charge commissions at all. Commission-free trading is a relatively recent addition to the investment landscape, but it has made trading much more accessible to retail investors.

 

Keep in mind, however, that even assets bought through a commission-free broker could have costs associated with them. Investment funds, for instance, will still charge an expense ratio for management if purchased on a brokerage site that charges no commission.

 

When deciding what kind of brokerage is right for you, there are a few factors you should keep in mind. Full-service brokers tend to be best for individuals with higher net worths who don’t want to manage their investments as actively.

 

Discount brokers, by contrast, are great for those who want to take a very active role in their investments or who may not have much money to get started with. If you’re new to investing and starting with a small budget, consider a discount or commission-free brokerage.

 

Finally, you can buy and sell stocks through stock funds. These are large funds that invest exclusively or primarily in stocks. In some cases, the funds are diversified across many different types of stocks. In others, they focus on one particular industry or market capitalization range. Some funds, known as index funds, also buy the entirety of a target stock index in order to track its overall returns.

 

Stock funds have the advantage of being more diversified than shares in individual companies. The funds can also successfully pursue particular financial goals. For example, high-growth funds allow you to pursue more rapid growth at a higher risk level. Dividend funds focus on generating income through dividend yields.

 

The process for buying stock funds varies slightly based on the type of fund. Some funds don’t trade on public exchange while others do. These are called electronically traded funds (ETFs). Shares in ETFs work much like shares of individual companies in that they can be bought or sold through a brokerage account at any time during trading hours. This makes ETFs slightly more liquid and easier to sell when you need to withdraw money from them.

 

Choosing the right investment mechanism is a crucial part of putting your money to work for you. For most retail investors, brokerage accounts or stock funds will offer the most flexibility and convenience. That said, there are still advantages to DSPPs and DRIPs offered directly by companies. Be sure to carefully weigh your options and choose the method of buying and selling stocks that best fits your financial goals.

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