Every penny you spend on fees and commissions when trading detracts from the returns on your investments. That might not matter much to investors who trade only occasionally. Fees and commissions inevitably add up, though, for anyone who trades actively and does nothing to keep them down.
Fortunately, there are ways to invest in stocks and other investment vehicles without paying commissions at all. Some of these have been around for many years and will feel a bit restrictive and cumbersome to many investors. Even so, they can be viable options for those with particular goals and preferences.
Another way of trading without paying a brokerage for the privilege has become available only relatively recently. As the most flexible and accessible option of all, it should be of interest to any results-minded investor.
DSPPs, DRIPs, and Gifts: Three Old-Fashioned Ways to Buy Stocks Free of Fees
As recently as the 1970s, it was common to pay a broker hundreds of dollars in commissions for a single stock trade. In 1975, the Securities and Exchange Commission finally did away with regulations that had kept commissions so high, giving rise to the discount brokerage industry in the process.
Even before that point was reached, though, some companies had realized that the cost of buying their shares was too high for many investors to justify. As a result, they developed a couple of solutions in the form of special programs that can still be used today.
As might be expected, though, each of these corporation-specific systems has its own unique terms and conditions. Between this and the fact that only a few publicly traded companies participate, only a fraction of all investors will find them appealing. In some cases, though, it can make excellent sense to trade without paying brokerage commissions and fees by signing up for:
Direct stock purchase plans. A direct stock purchase plan, or DSPP, provides a way for investors to buy shares from the company in question, instead of a third party. These typically come with minimum purchase requirements and other terms, with some firms charging setup fees to first-time users. Investors who commit to making regular, automatic stock purchases will sometimes be charged no fees at all. In other cases, as with The Coca-Cola Company's DSPP, a fee of only a few cents per share will be charged. Other prominent companies that have DSPP options include American Express and ExxonMobil.
Dividend reinvestment plans. DSPPs are probably most common among old-guard companies that were around before the discount brokerage industry took off. The dividend reinvestment plan, or DRIP, is a somewhat similar option that more corporations offer. Signing up for a DRIP, whether through a brokerage or as the Direct Registration System owner of record, will divert all subsequent dividends to automatic purchases of the same stock. Unlike DSPPs, DRIP programs tend to be entirely free of fees. Companies like 3M, Kellogg, and Sherwin Williams have DRIPs that have been popular among investors for many years. Of course, a DRIP will only make a difference if and when a business actually pays dividends.
To participate in a DRIP at all, of course, an investor must already own shares in a company that offers one. Some DSPPs are also limited to existing shareholders, leaving others out.
A third longstanding–but especially restrictive–way to obtain stocks without paying brokerage fees, though, can potentially be used to circumvent such limits. Having someone else gift at least one share of the corresponding stock should allow an investor to participate in any DSPP or DRIP that might be available. In practice, though, this option will rarely make much sense today, given a more modern alternative.
The Rise of Commission-Free Trading
DSPPs and DRIPs can make sense for investors with set, well-defined goals and strategies who plan to hold positions for quite a while. Gifting shares of a stock to enable participation in such programs used to be somewhat common, but has since become quite a bit clumsier and potentially expensive to arrange.
Fortunately, there is another option that will almost always make far more sense: Simply opening an account with a brokerage that offers commission-free trading. Although that would have seemed inconceivable not long ago, it is now entirely practical for many investors to have all of their trades executed without any commissions being charged at all.
Brokerages can afford to offer free trades by raising money in other ways, as by selling aggregated order-flow data to third parties or negotiating especially generous rebates from exchanges. As with anything else, investors will always do well to account for related issues that might impact commission-free trading offers, like:
Order type limits. Most investors stick to simple trades defined by market and limit orders. Brokerages that allow commission-free trading tend to confine those offers to these basics. In some cases, commissions will be charged for any more complex trades.
Bid-ask spreads. There is always at least some difference between the price at which a stock can be purchased at market and the price at which it can be sold. Investors looking to make the most of commission-free trades will want to monitor bid-ask spreads closely to make sure they are not giving up too much ground in that area.
After-hours trades. Being able to trade a stock after the exchange it is listed on closes for the day has always been seen as something of a special perk. Brokerages that offer commission- and fee-free trades of other kinds still frequently charge for after-hours execution.
Trade execution priority. As might be expected, brokerages do not often prioritize the execution of trades that will not generate commissions. In most cases, though, even having a trade executed at normal priority sans the imposition of commissions will be a bargain for investors.
Regulatory fees. Organizations like FINRA and the SEC impose modest fees on stock trades as ways of financing their operations and certain programs. Even when a broker does not charge commissions on most stock purchases, it will normally be forced to pass these fees along when shares get sold.
Being aware of issues like these should make it straightforward to successfully leverage commission-free stock trading services. In practice, most investors will find that whichever limitations exist should be easy to justify in light of the money saved. As this way of avoiding trading commissions and fees is far more flexible and convenient than options like DSPPs and DRIPs, investors of all kinds will generally do well to consider it.