NOT to Buy Stock “Direct” from Companies

Over the years, increasing numbers of companies are selling stock directly to the public. But before you get too excited about not paying any brokerage commissions to buy stock, you should be aware of the many hassles and drawbacks of these programs.

1. We’re not talking big bucks here. The vast majority of these companies allow you to buy stock from them without a trading fee only by reinvesting your dividends. These are known as Dividend Reinvestment Plans (sometimes referred to as DRIPs). Because dividends are typically only a few percent per year of the amount you have invested, the amount you’re able to reinvest is minimal.

2. You’re still going to incur fees to buy your first shares. In order to enroll in a company’s DRIP, you must first purchase a share through a broker. Most brokers have minimum trading fees of $30 or $40, so if you’re buying a few shares, a huge percentage of your initial investment is going to commissions anyway.

3. Paperwork, paperwork, paperwork. Every time you want to set up a DRIP, you must request and complete the company’s application forms and you also must jump through the hoops of transferring your shares to them as well. If you go through the headache of doing so, say, a dozen times, you’re then rewarded with receiving a dozen statements on a regular basis from each individual company.

4. Taxes, taxes, taxes. These plans are really only feasible for non-retirement account investing, which unfortunately exposes all those dividends to federal and state income taxes. The fact that you’re reinvesting the dividends is irrelevant from the standpoint of taxes because the investments are being held outside the shelter of retirement accounts. If you’re still in your working years or otherwise in a high tax bracket, you don’t want to increase your tax bill even more by investing in higher dividend paying stocks. Thus, DRIP stocks make no sense.

5. Lack of control over when your sell orders are executed. To sell your shares, you mail in a request to the company. If in the two weeks that it takes for your letter to get there and be processed the stock price plunges, you get whatever price is available on the day the order is finally processed.

6. DRIPs duplicate something you can more easily do through a discount broker. A number of discount brokers, such as Charles Schwab, Fidelity, and Jack White, offer free stock dividend reinvestment for all types of accounts, including retirement accounts. Other discounters are likely to follow.

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