Can I Buy Stock Shares Directly?
Stock market investments provide opportunities for you to accumulate hundreds of thousands, if not millions, of dollars in wealth over the long-term. As a beginning investor, however, you may be discouraged from putting money to work within the stock market due to expensive brokerage commissions and fees. To bypass these expenses, you can purchase shares of stock directly from individual corporations.
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Identification
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Larger corporations offer direct investment plans for savers to buy shares of stock within the business. Some direct investment plans do not charge any commissions for you to buy and sell shares. To purchase stock, you will agree to automatic monthly bank drafts and/or mail in checks directly to the investment plan administrator. Direct investment plans usually allow you to buy shares for as little as $50 per month. For direct investment plan enrollment information, you will contact a corporation's investor relations department. This can usually be done through the company's website.
Features
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Direct investment plans are often dividend reinvestment plans (DRIPs). These plans grant you the option of reinvesting your quarterly dividends back into the corporation to buy additional shares of stock. If you choose not to reinvest dividends, you may opt to have the dividend payments deposited directly into your bank account.
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Considerations
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Direct investment plans carry the same tax ramifications as stock market investments bought through regular brokerage accounts. In general, you will owe taxes on the realized capital gains and dividend payments made through your direct investment plan. You realize capital gains when you sell shares of stock at a profit. Meanwhile, direct investment plan dividends may be taxed regardless of whether you choose to reinvest the money into more shares or take the cash in your bank account. At tax season, the plan administrator prepares 1099 forms to document your realized capital gains and dividend payments.
Strategy
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For retirement planning, Traditional and Roth IRAs are available through direct investment plans. Both types of IRAs offer tax-deferred growth, where you will not owe taxes on dividends and capital gains as they occur within the account. Traditional IRAs feature tax-deductible contributions and withdrawals that are taxed as ordinary income. Roth IRAs, however, are funded with after-tax money and allow for tax-free withdrawals. Roth IRAs are most beneficial for those who expect to retire in a higher tax bracket than is applicable to their current income. As of 2010, you are generally limited to $5,000 in annual contributions for Traditional and Roth IRAs, combined. Both retirement accounts may charge tax penalties if you withdraw your account balance before age 59 ½.
Warning
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Direct investment plans are not ideal for frequent traders. Your plan may only allow you to buy and sell shares once a week at an average price for the week. Because of these terms, you may be unable to move quickly and trade direct investment plan shares amid a stock market crash. Direct investments are therefore best for long-term investors who will stay the course for several years.
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