Commissions and stock purchases

When you buy stocks, someone involved has to pay a commission, unless you work on the floor of the stock exchange as a trader. Licensed brokers must initiate the trade, and they get a cut. How much commission you pay for your stock purchases, however, varies widely.

I'll talk a little about four ways to purchase stocks, along with their advantages and disadvantages.

• Purchase through a full-service broker. You call up “your” stockbroker, chat with her about a purchase or a sale you want to make, and she executes it for you. Or she may watch your account and recommend sales or purchases if something looks like it's heading against you. She can answer your questions and give you advice. The flip side is that she's very expensive. A full-service broker I've dealt with before charged $25 a trade, and those trades are usually in lots of 100 shares.
• Purchase through a discount broker. Hop on the Internet, log into your account, and trade away. Commissions for trading online are a lot lower — usually in the neighborhood of $10/trade. The downsides are that you usually need to buy round lots (multiples of 100 shares) to get those low commissions. If you're after Google, that's around $30k now! Also, don't expect personalized investment advice for this price. (Note: I use Scottrade; online market orders and online limit orders are only $7. Send me an e-mail at info AT mightybargainhunter DOT com and I can hook you up with some free trades.)
• Purchase through a consolidator. If you don't have the money (or don't want to take on the risk) of owning a round lot of an expensive stock, there are companies that will pool your money with other customers' money to purchase the round lots. In this way you can buy $50 worth of Google, which is about a sixth of a share, because there are a bunch of other people buying Google at about the same time, or the company already owns Google and they can allocate part to you. So, you can still take part in the rise (or fall) of Google without shelling out tens of thousands — you can put in $50 a week to buying Google by sending it to a “folio service,” just as if you're putting it into a savings account. However, this is by far the most expensive way to buy stocks.
  ShareBuilder.com for example, charges $4 per purchase with their no-monthly-fee account (it goes down for paid accounts). Say Google stays at $300/share and you buy $50 worth of Google each week until you have 100 shares. You would spend $4 x 6 x 100 = $2,400 to buy 100 shares of Google — as opposed to $7 if you bought the same shares all at once through Scottrade. This is the price that comes with the convenience of buying fractional shares through a folio service. If you decide that you want to invest in stocks but don't have a lot of extra money lying around, this will let you get into the game.
• Purchase directly from the company. These are called direct purchase plans, or DPPs. You go to one of about 2,000 companies who offer such plans, and buy stock directly from them. You have the flexibility to buy fractional shares without broker's commissions. However, there are usually administrative fees with these plans. A colleague of mine, though, was able to buy shares of a utility through such a DPP, and he could get the shares at a discount to market price! Quite a deal.