The Pros and Cons of Direct Investing in Stocks

Lee Barnes is a die-hard do-it-himselfer. The Akron, Ohio, resident has done everything from building his own race cars to remodeling his own home.

And when it comes to investing in company stocks, Barnes does it himself too.

Barnes is part of a growing movement toward direct investing. Buying stock through “direct-purchase plans” is similar to buying clothing from the factory. The consumer goes straight to the firm that sells the product--in this case, company shares--and buys wholesale. It takes a little more time and effort, but ultimately, consumers can save thousands of dollars by cutting out the middleman.

Already, the National Assn. of Investors Corp. says 100,000 of its members buy stock through these plans. And more companies and consumers are warming to the concept each day, said Tom O’Hara, chairman of NAIC’s board of trustees.

There are about 900 companies now offering direct-purchase plans, said Dave Blackmon, editor of Direct-Purchase/Dividend-Reinvestment News in Etiwanda, Calif. Although that’s only a fraction of the companies listed on major U.S. exchanges, the participating firms include many household names such as Kellogg Co., Kmart, McDonald’s, J. P. Morgan, Honeywell and Philip Morris.

The biggest advantage of direct purchase is that it’s cheaper. Instead of paying a stock broker between $25 and $150 for each trade, those who buy through direct-purchase plans usually have no brokerage charges once they’ve gotten their accounts set up. Their only cost is the price of the company’s stock.

Some companies do charge trading fees when the investor sells stock. But even these fees are modest, typically topping out at $3 or $4 per sale, O’Hara said.

The disadvantages of direct purchase boil down to two basic problems: Investors get no advice, so they must have the ability to research and evaluate whether a company’s shares are a good deal or not. And buying direct is not as quick and simple as making a phone call to your broker.

It’s generally a two-step process.

Most companies require consumers to have at least one share of their stock before they can buy direct. That first share can be purchased either through a broker or through one of several organizations that facilitate direct-purchase plans.

The most economical of the options is to go through the National Assn. of Investors Corp., which charges a one-time $32 fee to join, plus a $5 transaction fee for each company the investor buys a share in. The $5 fee stays the same whether the investor buys one share or 100 through the NAIC.

The transaction fee essentially just pays the cost of having the NAIC prepare and mail the plethora of letters required to get a customer’s account set up with a participating company. The NAIC then forwards the company’s direct-purchase prospectus to the investor with the investor’s account number.

After that, investors deal with the company directly. The rules of each company’s plan, as well as who to contact to invest, are spelled out in the prospectus. Those rules include how much must be invested at one time--company’s typically require investments of at least $10 to $25--and whether or not there will be any trading fees.

The company prospectus will also delineate when the company trades stock for direct-purchase investors. Usually, this is only once or twice a month--perhaps on the 15th and 30th. A few firms handle direct-purchase transactions just once every three months.

In most cases, investors who want to purchase shares must deliver a check to the company’s direct-purchase representative a few days before the stock is actually bought.

Essentially, that means that investors who go this route must plan to hang in for the long haul, because they usually won’t have the ability to trade in and out of stocks when prices suddenly surge or dip.

Although direct-purchase investors do have to abide by the company’s minimum investment rules, they don’t have to buy any set number of shares. If you send a check for $25 and the company’s stock goes for $20 on the date of purchase, for example, the company will usually credit your account with 1.25 shares. Many companies give investors the option of reinvesting their dividends or taking the payments in cash.

To get more information on direct-purchase plans, investors can contact the NAIC at P.O. Box 220, Royal Oak, Mich. 48067, or (313) 543-0612.

Blackmon also publishes a directory that gives names and phone numbers of companies that offer direct-purchase plans.

The directory costs $149 and can be ordered through Direct-Purchase/Dividend-Reinvestment News, P.O. Box 388, Etiwanda, Calif. 91739.