8 Cheap, Easy, and Not-So-Obvious Ways to Invest in a Company's Stock
Investors typically purchase shares of a stock through an online brokerage or full-service firm. They research possibilities among the universe of available stocks, identify a stock to buy, and place an order online or agree to a purchase based on a broker's recommendation. (See also: Begin Your Investing Career Right With Some Mutual Fund Basics)
But there are other ways to invest in a company's stock. Some are cheap (or free!) ways to acquire shares while others are simply an alternative to a standard investment account. Here are eight nontraditional ways to make a stock investment:
1. Direct Stock Purchase Plans (DSPPs) or Dividend Reinvestment Plans (DRIPs)
Invest through a direct stock purchase plan (DSPP) or dividend reinvestment plan (DRIP) if such a plan is available for your desired company. Many name-brand companies offer a plan administered by a transfer agent.
Visit the Shareholder Services section of the company's website to determine if a plan is offered. Alternatively, view participating companies at Computershare InvestorCentre, First Share, Shareowner Online, or similar sites that facilitate investments in these plans. Note that mutual funds may be listed along with corporations such as Best Buy, Du Pont, Hanesbrands, Nike, Pfizer, and Target.
The advantage of investing through DSPPs and DRIPs is that you can avoid charges from brokerage firms. However, you may incur other fees, and you can't specify the price (place a limit order) for the stock; instead, shares are typically purchased on a prescribed schedule for the market price.
2. Mutual Funds
When you buy a mutual fund, you invest in the companies' stocks held by the fund. For a current list of these stocks, view holdings by visiting the fund's website, looking up the ticker on Morningstar.com, reviewing the prospectus, or reading the shareholder's report. Note that holdings change periodically.
You can't select individual stocks (although you might choose a mutual fund based on its underlying holdings). And you'll pay fees for fund administration, whether the fund is actively or passively managed. However, this method is ideal for the hands-off investor who wants to participate in the growth of the economy without having to scrutinize and keep up with individual securities.
3. Exchange-Traded Funds
Similar to purchasing mutual fund shares, buying shares means you are investing in stock held by the ETF. To view a list of its holdings, research the fund on your brokerage firm's website; alternatively, request a prospectus for a breakdown of the stocks represented by the ETF.
Again, like the mutual fund, the advantage of the ETF is that you don't have to make stock-picking selections, while the disadvantage is, well, you can't choose individual stocks.
4. Profit-Sharing Plans
You may receive stocks, bonds, or mutual funds through a profit-sharing plan offered by your employer.
The employer specifies the securities or other forms of compensation to be distributed through the profit-sharing plan. You might receive company stock, shares of a mutual fund from a pre-selected list, or cash that you can invest yourself.
Although you can't control what specific investment your employer shares through its plan, you can benefit from the investments made on your behalf.
5. Stock Options
As a performance incentive and employee benefit, your company may give stock options. Generally, you'll get the option to buy a certain number of shares at a designated price within a specific time frame.
Ideally, you'll exercise the options at a time when the stock price is above the option price. For example, you may be given the option to purchase 100 shares of ABC stock at $10 per share for the next two years. This contract is attractive if the shares are trading at $15 on the NYSE (New York Stock Exchange). You invest $1,000 but increase your net worth by $1,500.
Note that stock options are not a sure way to make money. The stock price could fall below the option price, making them worthless.
Exercising stock options can be an excellent way to build wealth, albeit in a concentrated position (aka lots of eggs in one basket) that is considered risky.
6. Employee Stock Ownership Plans (ESOPs)
Similar to exercising stock options, you can acquire a large position in single stock through an employee stock ownership plan (ESOP). Your employer gives you shares of company stock according to a formula that may be based on salary, years of service, etc.
Again, like stock options, you can acquire significant assets through an ESOP, especially if the company (and its stock price) performs well over time. On the other hand, the value can easily be diminished if the company and its stock falter.
7. 401(k) or Similar Plan
Through a 401(k) or similar plan, you can invest in mutual funds or other securities available from a pre-selected list. Your investments may be boosted if your employer matches your contribution.
Your company's 401(k) plan may or may not have a great selection of mutual funds. The fees charged may be reasonable or excessively high. Still, participating in such a plan is an easy and automatic way to invest.
If you are fortunate to have a wealthy friend or family member who is an investor, you may become the recipient of a stock gift. Most likely, you'll need to open a brokerage account to receive the shares.
Obviously, you won't be able to pick the stock. But typically you'll have the choice to either keep the shares or sell them and invest the proceeds in another investment of your choice.
As you can see, you may not be able to invest using all of these techniques. Your employer may not offer stock options or profit sharing, for example. But you could invest through direct stock purchase plans or buy an ETF for a low fee.
However you acquire shares, remember to look at your entire portfolio when making investment and asset allocation decisions, not just what's sitting in your brokerage firm's account. The wealth accumulated through these nontraditional methods may be significantly larger than amounts inside your brokerage account.
Are you an investor? Which of the above methods do you use to buy shares?