Saturday, December 27, 2014

How to pay zero commission investing in stocks

Investing involves costs-- time and effort spent researching securities and managing your portfolio, SEC fees on stock sales, management fees if you invest in funds, capital gains tax, tax on dividends, bid-ask spread, slippage, etc.-- all of which reduces investment returns. To add commission charges on top of all these costs is to further diminish your returns unnecessarily, when there are so many ways today to invest in stocks without paying a penny in commissions. In this post, I will highlight two best routes to invest in stocks sans commissions:

1. Buy stocks directly without a broker
Dozens of companies offer free direct share purchase plans (DSPPs) without any fees to buy (although all charge fees to sell). Many of these no fee DSPPs are offered by great companies that make good buy-and-hold investments.,, and have some of the biggest offerings of DSPPs. You can also search online using bing or google for no fee DSPPs, as new ones added and old ones removed from time to time. Here are 20 of my favorite no fee DSPPs:

Becton Dickinson,
Bryn Mawr Bank Corp,
CR Bard,
Emerson Electric,
General Mills,
Healthcare REIT,
McGraw Hill,
Norfolk Southern,
Piedmont Natural Gas Co,
Pinnacle West,
Public Service Enterprise Corp,
Sonoco Products,
York Water.

I am providing this list to show that it is possible to buy a diversified portfolio using no fee DSPPs alone, and this is not a recommendation to buy. Please do your own due diligence.

You can enroll by making a one-time investment, or a monthly investment amount, typically $50 or $100 a month, but can be as low as $1 a month for Pinnacle West. Through dollar cost averaging, you can autopilot your monthly savings into great companies, buying more stock when the prices decline, and less when they advance.

An added bonus is that some no fee DSPPs even offer you a discount, such as Bryn Mawr Bank Corp and York Water currently offering 5% discount on reinvested dividend. Like company match in a 401(k), that is the rare free lunch on Wall Street you don't want to miss out.

2. Use a commission free broker
Although most brokerage firms charge commissions for buying and selling stocks, at least two do not as I write. One is a major brokerage firm: Merrill Lynch (, now part of Bank of America. The other is a small, new player: Loyal3.

Merrill Edge gives you 100 free trades as part of their Preferred Rewards Program so long as you maintain at least $100,000 in combined account balance across all Merrill Lynch and Bank of America accounts. You can get 30 free trades if you maintain at least $50,000 account balance. If you are an investor, as opposed to a high frequency trader, even 30 trades a month should be more than sufficient.

Loyal3 charges no fees at all with no minimum balance requirements. However, you can only choose among a list of 64 stocks to invest in, as I write. The number of offerings is expected to expand as the company become established and more companies get on board. Many of these are solid consumer goods stocks that make great long term holds. Unlike Merrill Edge and most traditional brokers, loyal3 allows you to buy fractional shares and invest a fixed dollar amount monthly, taking advantage of dollar cost averaging just as in a DSPP.

If you rather buy funds instead of individual stocks, plenty of brokers, such as TD Ameritrade, Fidelity, Charles Schwab, offer a list of commission exchange traded funds (ETFs). ETFs are the best funds to invest in, as they have lower expenses, are more tax efficient, and are more liquid than mutual funds. I prefer investing in stocks directly, because while seemingly small, annual expenses of funds do add up over time.

A word of caution: SIPC insurance covers only up to $500,000 per brokerage account. I would recommend staying under this limit with any broker, especially with small, new players like loyal3.

What do you think? Do you pay commissions to invest in stocks? If so, would you switch to these methods? Know any better ways to buy stocks commission free? Thanks for reading!

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