This article is a simple guide on how to buy stocks commission free. You have many options when it comes to putting your money into investments. But if you’re a new investor, it’s best to not waste small amounts of cash on commissions and fees. Luckily, investors have a few very good and legitimate options to buy stocks for free, often starting with as little as $10 to buy stock.
Note: As of May 22nd, 2017, Loyal3 is no longer operating and has been removed from this article.
In this article I’ll be discussing:
- M1 Finance – Buy and sell unlimited stocks and ETFs. 100% FREE as of December 2017.
- Robin Hood – The largest no-fee broker
- Stock investing through index funds at brokerages that allow you to trade ETFs for free (such as TD Ameritrade)
- Direct Stock Purchase Plans (DSPP), also known as DRIP investing (Dividend Reinvestment Plans)
How To Buy Stocks Commission Free
No Trading Fee Online Stock Brokerages
It sounds too good to be true, but no-fee brokerages are out there and gaining popularity. Online you can find a few no-fee brokerages that allow you to buy and sell stocks and pay no transaction fees. These companies primarily make money by finding other sources of revenue (i.e. margin fees) instead of charging the customer trading fees.
My favorite new online investing platform is M1 Finance. M1 Finance is part robo-advisor, part traditional online broker. The way you interact with buying and selling ETFs and stocks on M1 Finance is more intuitive than traditional trading platforms.
Best of all, M1 Finance is 100% FREE.
On M1 Finance, you create “pies” of holdings that you put together on your own. Or, they have pre-set investing pies that fit your object. Based on the percentages in your pie, any money your put toward you account will be split exactly how you choose your allocations.
For example, in my account, 50% of my money is in the Vanguard Total Market Index. The other 50% is split evenly among five dividend stocks. Each stock is 10% of my holdings. It’s a very slick way to invest and growing in popularity. Fractional shares are allowed and there’s a daily trading window which keeps costs low. Make as many changes as your want to your portfolio and never get charged for your activity. Game changing platform.
Another newer brokerage house gaining popularity is Robin Hood. This company calls itself a zero-commission brokerage. And it is. You can make trades from you phone and the company does not charge a commission. This is a start-up, so the business model hasn’t been entirely proven yet. But for now, you can trade there without any fees.
Robin Hood plans to make its money a few ways. First, it will collect interest on idle cash. Second, it plans to offer margin trading. That is a service provided by most full-service brokerages where the investor borrows money to trade and pays interest to the broker. They have some other potential income streams but that doesn’t concern investors. As long as it is free, let’s not complain!
Robin Hood has a few downsides. Research is certainly limited compared to an online broker like TD Ameritrade or E*TRADE. But there are plenty of other places to do research, such as Morningstar or Yahoo Finance. Another downside is trading is only available by smartphone. They haven’t built out a desktop trading platform. This is a way to save on costs.
But trading via a smartphone is natural and sufficient for most younger people. I buy stocks on my phone all the time, and it’s quite easy for TD Ameritrade. From the reviews I’ve read, Robin Hood has designed an excellent interface for mobile trading.
I haven’t used Robin Hood myself, so I can’t personally recommend it. But the feedback from 2+ million uses is very positive.
Stock Investing Through Index Funds and Mutual Funds
Brokerages and large mutual fund companies are other places to buy stocks for free. Companies like TD Ameritrade and others such as Fidelity, Vanguard, and American Funds will allow you to buy selected funds and ETFs for free. TD Ameritrade currently offers 100+ commission free ETFs to trade.
To buy or sell most stocks, you will still have to pay a trading fee as these are full-service. However, these companies provide no-fee trades for ETFs and certain mutual funds.
Companies like Fidelity and Vanguard do not charge a fee if you buy their own mutual funds. Mutual funds come in all shapes and sizes, including stock, bond, domestic and international allocated funds. Some funds are managed, meaning there are managers making decisions about what investments are in the fund.
Index funds, on the other hand, are the cheapest way to invest in a large diverse group of stocks. If you purchase an index fund through the broker that manages the index fund, they will not charge you a fee. Vanguard was the first to advocate this type of investing back in the 70’s. Other companies like Fidelity have followed suit.
Since index funds track a known group of stocks, it costs very little to manage them. Therefore, index funds usually charge a minimal annual fee of just 0.20% or less. I know this article is about no-fee investing in stocks. But the diversification you get through an index fund is worth that tiny cost. Great investors such as Warren Buffet suggest index funds is the best investment type for the vast majority of investors.
By investing in index funds that are free to trade, and doing so in retirement accounts through a large broker offering these types of investments, you’ll participate in stock market gains over the long-term while minimizing the risks of owning individual stocks.
In my own retirement accounts at Fidelity and TD Ameritrade, I practice the strategy of index fund investing. It is a hands-free way to invest. I set my investments and forget them. Best of all, they are in tax-advantaged accounts meaning my investments can grow tax-free.
Direct Stock Purchase Plans (DSPPs) and Dividend Reinvestment Plans (DRIPs)
I commonly refer to Direct Stock Purchase Plans (DSPPs) as DRIPs (Dividend Reinvestment Plans). DRIPs are a way to buy stock directly from the company using what’s called a Transfer Agent. Transfer Agents manage these plans for large companies who want to offer their employees an easy way to invest. Shares issued to shareholders are listed in their name, as opposed to street name, which is the term they use when you buy through a broker. I explain this in detail here.
DRIPs are widely popular. If there’s a particular company who’s stock you want to own, to find the DRIP you can start at their Investor Relations website. Most public companies have an Investor Relations site. They’ll direct you to the Transfer Agent that administers the program. Some of the bigger Transfer Agents include Computershare, Wells Fargo Shareowner Services, and Amstock. I personally own Chevron and Procter & Gamble through Computershare and have been very happy with the service they provide.
But not all DRIPs are created equal.
Many DRIPs charge a fee to buy stocks and reinvest dividends, and almost all charge a fee to sell. When I start to invest in a new DRIP, I only buy the ones that are free or charge a very small fee. Fortunately, the Transfer Agents make it easy to find the free DRIPs. Each plan clearly lists the fees involved, and sometimes you can actually filter out the ones that charge fees.
Computershare makes it very easy at this link. For others, it is important to read the prospectus to know exactly what they charge.
Minimum investments sometimes do apply to these plans. You may need a minimum of $250, $500 or more to open an account. And there’s another very important distinction. DSPPs are plans that you can access directly. Some DRIPs are DSPPs. HOWEVER, not all DRIPs are DSPPs. Let me explain.
If a company offers a DRIP that is not a DSPP, that means you need to own at least one share of stock to be able to participate. So you’d have to acquire a share in your name. To do this, you need to buy through a brokerage and have them transfer it out of street name and into your name. There’s a fee associated with this, so I don’t recommend that. Another cheaper way is to have a current shareowner give you a gift of one share.
A few services online can help facilitate a share transfer too. The biggest one I know of is First Share. Using that service, you can buy a share from someone directly which would automatically enroll you in the DRIP.
This whole transfer agent business has frustrated me for years. There have been stocks I wanted to DRIP into but didn’t want to pay extra to acquire the first share. Figuring out which ones do and don’t can be a pain. Then making sure you know all the fees associate with it is important too. Again, some don’t charge fees at all. That is why I’m telling you about them here. It is another option.
Coca-Cola, for example, has a DRIP through Computershare. I’ve participated for nearly 20 years. But they charge fees to buy, sell, and reinvest the dividends.
Disney is another stock available through a Transfer Agent with fees. Read all about the Disney DRIP here.
If you are looking to invest in one particular stock, the DSPP/DRIP may be a good place to start looking. Start at the investor relations page to see what is available. Then make sure you understand any fees. B
Before the internet revolution, buying stock through a broker was very expensive. The price of entry was enough to scare off most small-time investors.
The first time I wanted to buy a stock through a broker was intimidating. In 1996. I called a few up from the yellow pages and asked if they would be willing to help me buy $400 worth of stock in a company called Clearly Canadian. After a few calls, one of them said he would do it for me. The fee was $60. I was so certain this stock would be huge, that I made the purchase.
It turned out to be a terrible investment and I lost 75% of my money. The fee alone was robbery. But that’s the way it was before internet stock trading.
Nowadays, we have many options to keep our fees to a minimum, and a few that make buying stocks online easy and free. The best option for commission-free trading today is Robin Hood. If you are a beginner investor, I don’t know of a better place to put your money. The easy, modern feel of the website and mobile app is very comfortable.
If you have any questions about getting started investing or how to buy stocks for free through any of the services I’ve provided in this article, feel free to leave a question in the comments section below and I’ll be happy to provide more detail on my experiences. You can also subscribe to my blog. I write about investing, retirement and travel related topics on a weekly basis. I track my passive income sources on a monthly basis, sharing with my readers.
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