Monday, September 23, 2013

How to Buy Stocks Without Paying a Commission: 10 Different Ways

Back in the old days, commissions were pretty substantial. Some brokerage firms had minimum commissions of $35 per trade and some were much higher. And if you bought a low priced stock, you really got screwed.

I remember back when I was a stockbroker before the discount traders came along, if a client bought 10 shares of a $100 stock, they would 'only' pay $35, in other words 3.5%. However, for that same $1,000, if the client bought 1000 shares of a $1 stock, the commission would be a whopping $100 or 10%. (We really enjoyed those trades when they came in, but we couldn't solicit them.)

Now, even paying $7.99, $8.99, or $9.99 per trade, which is a huge savings over the historical commissions, the costs can still add up. Let's use $10 per trade to make it simple. If you do two trades a day, that's $400 a month that you have to earn in your account just to break even.

But there are various ways of buying stocks without paying a commission. Many of these techniques are more appropriate for the longer term investor as opposed to the trader. Here they are:

1. IPOs

Whether you call them Initial Public Offerings, IPOs or New Issues, they are basically shares of stock that are sold to the public for the first time. When these shares are issued, there is no added commission. The trick is to be able to get shares from your broker for hot issues. I have some friends (with accounts in the $100,000 and up range) that have been able to get shares of popular IPOs but usually in amounts ranging from 100 shares to 400 shares, and sometimes as low as 10 shares.

2. Secondary Offerings
Secondary offerings are shares that are issued by a company that is already publicly traded. These could be shares being sold by large investors or institutions or they could be newly issued shares where the cash goes right to the company, or a combination of both. A company could issue new shares several different times but it would still be referred to as a secondary offering. Usually the shares are priced at around the closing price of the stock, but sometimes slightly lower or higher. In any case, there is no added commission to purchase the shares.

3. ETFs
Several online brokers, including Vanguard, Fidelity, and TDAmeritrade, will allow you to trade ETFs with no commissions. However, there are generally restrictions on trading these, usually relating to holding periods.

4. No Load Mutual Funds
If you are considering investing in a mutual fund, pick a no load fund. There are thousands of mutual funds to choose from, covering every sector, every industry, every index, and every style of investing. Why pay loads of 3% to 8% when you can get a no load? 

5. Dividend Reinvestments (DRIPs)
 Dividend Reinvestment Plans are arrangements whereby the dividends from an income producing stock are automatically reinvested back into shares of the same company. On almost all of these plans, the dividends are reinvested free of fees and commissions. If you need a list of these companies that offer these plans, you can check out The Moneypaper's and DRIPInvestor.

6. Direct Stock Purchase Plans (DPPs or DSPPs)
For smaller investors investing money on a long term basis, Direct Purchase Plans, also know as Direct Stock Purchase Plans, may be worth looking into. Basically, the plan allows you to invest almost any amount of money into a stock without any fee or commission in many cases. I'm talking about lesser known stocks and major stocks; companies such as Abbott Labs (ABT), American Electric Power (AEP), Exxon Mobile (XOM), and Johnson and Johnson (JNJ). Let's use Exxon Mobil as an example. You can invest as little as $50 each time or as much as $250,000. Suppose you just want to invest $50 in the stock every few months. Using a Direct Purchase Plan, there would be no commission. If you did it through an online broker and paid a $10 commission, it would work out to 20% of your investment, and that's assuming your broker would even allow you to buy a partial share.
There is a small catch, however. In order to take advantage of most of these plans, you must own at least one share of the stock to begin with (which happens to be what the requirement is for Exxon Mobil). The Moneypaper, described in the previous section, has a service that allows you to buy an initial share or shares to get you started.

7. Special Offers from Online Brokers
Keep an eye out for special offers from online brokers. I try to cover them when I see them. For example, both TDAmeritrade (unlimited trading for 60 days) and E*Trade (500 free trades) are offering commission-free specials.

8. Stocks Sold Out of Inventory or from a Market Maker
This is an option that used to be available from smaller brokerage firms which would buy shares of over-the-counter stocks into inventory or would be market makers in the stocks. Often they would be able to sell the shares at what would be a 'net' price, in other words, without an added commission. These shares would often be local bank stocks that were not widely traded. So for example, if XYZ Bank was trading at 9 bid, 10 asked, you could buy the shares from the firm without paying a commission at 10 per share. However, if you bought the shares from another brokerage firm, you would pay 10 per share plus commission. I'm not sure if these deals are still available but if you work with a smaller brokerage firm, you could check with them.

9. Merrill Edge
Merrill Edge is offering 30 free online trades per month, including equity and ETF trades. The catch is that you have to have a balance of $25,000 in your Bank of America deposit accounts, or have $25,000 in cash in your Merrill Edge self-directed accounts, or maintain Platinum Privileges status.

10. Reimbursements from Brokerage Firm
If your online broker makes a mistake or if their service is down for a while, preventing you from trading, ask for some free trades as compensation. I recently had an issue with a broker where I placed an order through their phone app to sell out of my position and it ended up selling a security in my account that I didn't even own. All I did was click on the position, clicked Close, left it on Market Order, and clicked Submit. I caught it right away, called them, they corrected the order and they even offered me five commission-free trades as compensation.

11. Running Ads to Buy Stocks [Bonus Technique]
I know the title said '10 Ways' but I thought I would include this bonus technique because it is an interesting one. Let me start out by saying that before you even consider this, talk it over with an attorney, as there may be some SEC issues involved. Basically, this involves advertising to buy shares of stock in certificate form from other investors. I know of an individual who did this by advertising in certain classified ads, and a small company that did this using postcard mailers.
The hook for the sellers to the individual was that he would buy stock in quantities as few as one share at the closing price on a mutually determined day, and the seller wouldn't have to pay a commission. For a five or ten dollar stock, it was a great deal.  He told me that he made a lot of purchases from people who bought one or a few shares for a dividend reinvestment and/or direct purchase plan that they had started years earlier that they gave up on.
The hook for the sellers to the organization was that they would buy shares of stock in certificate form that were no longer trading in order to allow the sellers to establish a tax loss. This organization would charge a 'small fee' to handle the transaction, which would be more than the purchase price for the shares. In other words, they would pay a penny a share for 100 shares or one dollar, and charge a $20 fee, making $19 on the deal.

When you look at all these different ways, you may just decide that it is much easier and simpler to just pay the ten buck commission to buy the stock.



bsorge said...

Most of these ideas are garbage, but the Merrill Edge sounds interesting. Knowing Merrill Lynch I just wonder what the catch is. In the past they were usually expensive.
I wonder if this deal goes away after a period of time?

Stockerblog said...

I think Merrill has been running this offer for over a year. They probably have the right to revoke it at any time, but at least in the meantime, it's a great deal if you can limit your trades to 30 a month.

Stockerblog said...

Just talked to a rep at Merrill. He said that offer has been around for a few years, and he hasn't heard anything about them planning to cancel it. He said the only catch is that if you go over 30 trades, they will charge you $6.95 a trade.