No Sweat Direct Investing
For many stock buyers, even online discount brokers aren't cheap enough. When you're building a portfolio $300 at a time, a $14.95 commission puts a serious drag on your return. So small-scale Warren Buffetts have traditionally bypassed brokers by turning to companies that sell their stock directly to the public. Direct investing is indeed cheap--but it exacts a toll through hefty paperwork, cumbersome bookkeeping, and tax-return nightmares.
But all over the Web, services are now springing up that make direct investing easier (table). Share shoppers can find searchable databases that spell out all the many details of companies' direct stock purchase (DSP) plans or dividend reinvestment plans (DRIPs). In some cases, companies allow Web services to provide electronic prospectuses and online enrollment, taking some of the hassle and much of the delay out of getting started. They also tackle one of the biggest barriers to DRIPs--the need to acquire at least one share of a company's stock so you can enroll. First Share, for example, can link up a newbie who needs an initial share in, say, Pep Boys, with a seasoned investor who has a share to sell.
But direct investors still depend upon the kindness of corporations: Companies must choose to offer direct access to their stocks. DRIPs, which let existing shareholders collect dividends in shares instead of cash, have long been popular with utilities and banks--companies that have heavy capital needs and a desire to court small investors.
DSPs, which allow one-time or periodic stock purchases without a broker, are widening the reach of direct investing. Offered by only 30 companies in 1994, DSPs are now available from 570 corporations, rapidly catching up with DRIPs, which are offered by 882 domestic companies and some 300 foreign ones offering American depositary receipts. But many popular companies--including most issuers of high-tech stocks--still don't want the expense of setting up and running a DSP or DRIP.
The latest Internet offering attempts to clear that hurdle. In early November, Netstock Direct, an online DSP enrollment service, will unveil ShareBuilder, a site where investors will be able to sign up for automatic weekly or monthly investments of fixed dollar amounts in specific stocks. The service plans to start with about 200 of the largest and most active issues--including such names as Microsoft, Cisco Systems, and Dell Computer, none of which offer direct investing now.
By pooling its customers' orders into one weekly purchase, ShareBuilder can charge just $2 per purchase for each stock selected, says Netstock Chief Executive Jeff Seely. Custodial accounts for children will pay just $1 per transaction. The service will also track all your ShareBuilder stocks on one statement, rather than the quarterly flood of mailings from DRIPs and DSPs, where each stock's plan creates its own paperwork. Netstock Direct also will offer immediate sales of ShareBuilder stocks, for a fee of about $20. In contrast, traditional direct-investing plans can take days to sell shares.
ShareBuilder keeps what Seely calls the biggest advantage of DRIPs and DSPs--fractional shares. A customer who puts $200 into each stock could get 2.119 shares of Microsoft, 1.655 shares of America Online, and 2.614 shares of Intel, after paying $6 in commissions. Fractional shares are vital, Seely says, for "dollar-cost averaging"--investing a fixed dollar amount in a particular stock on a regular schedule. Studies have shown that dollar-cost averaging boosts returns by keeping funds fully invested and by helping investors acquire stock at a low average price. But "most brokers won't take orders for fractional shares, or a standing order to buy a dollar amount of shares each month," says Seely.
Actually, one broker comes close. Charles Schwab offers a plan called Stock Builder that mimics company-offered DRIPs. Schwab customers can reinvest dividends from any New York Stock Exchange or Nasdaq-listed company by buying additional shares--including fractional ones--without commissions. About 30% of Schwab's customers use the plan. Other brokers offer more modest services. Fidelity Investments' online brokerage, for example, will enroll customers in DRIPs offered by companies whose shares they own.
DOLLAR DAYS. Direct investing may be getting easier, but it's still not painless. While direct investors sidestep brokers' commissions, companies charge a variety of fees. Wal-Mart Stores' DSP has a typical schedule: $20 to enroll, a $250 minimum initial investment (waived if a buyer agrees to invest $25 a month for 10 months through an automatic debit plan), and a $1 fee plus 10 cents per-share commission on each purchase. A $500 automatic-debit order would net 9.685 shares at a cost of $2. WalMart also charges $20 to sell shares from a DSP account. "We recommend companies that don't charge fees," notes John Sandfort, marketing vice-president for Temper Enrollment Service, which buys initial shares and handles paperwork for new DRIP investors. But that narrows the number of plans to 700.
Direct investors also will spend some of their savings on accountants--or aspirin. "The hassles of these plans are often underplayed," says Maria Crawford Scott, editor of the American Association of Individual Investors' AAII Journal. Each DRIP or DSP stock is a separate account, so investors who want a consolidated portfolio must put the numbers together themselves. Small, frequent purchases make a hash of calculating a stock's basis and capital gain when an investor sells. And the discounts on shares that some companies provide their DRIP members also get counted as taxable income--although those, at least, are tracked by the company and reported on Internal Revenue Service Form 1099-DIV.
Most important, says Scott, "don't buy a stock just because it's available for direct investing." Small investors need to be, if anything, even more analytic than their better-heeled counterparts when they screen stocks. That may require going outside the 1,600 or so stocks available through company-sponsored plans. But as the number of direct investment plans grows and new options proliferate, it's getting easier all the time to invest without a broker.
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