Tuesday, November 13, 2012

How To Buy Shares Without A Broker

A particularly frugal friend approached me recently wanting to know if there was any way to buy shares without the need to pay brokerage fees.

Well the short answer is you can't.  According to the Australian Stock Exchange website:

"All shares listed on ASX can only be bought or sold through a broker. A stockbroker acts as your agent to buy or sell shares on your behalf, for which a fee is charged."

This statement is clear and unambiguous.  However, it got me thinking.  There are actually a few exceptions to this rule.  The exceptions are all share purchase transactions in which the ASX is not directly involved.

So The Long Answer Is Yes ... But In Very Limited Circumstances

There are a number a scenarios where you can buy shares without paying a stock broker.  But just because you can, it doesn't mean you should.  But more on that later.

Dividend Reinvestment Plans

The first option is available to investors in companies which operate a dividend reinvestment plan (or DRP).

Under a DRP, an investor is able to forgo their cash dividend and instead receive new shares to the same value.  As an added bonus, some dividend reinvestment plans issue these shares at a discount to the prevailing market price.

So if you're an existing shareholder of a particular company and you'd like to increase your investment in that company, this can be an effective way of doing it without paying brokerage.  Just be aware that not all companies operate DRPs.

Read more in what are dividend reinvestment plans.

Share Purchase Plans

Share purchase plans offer you another way to increase your existing shareholdings without paying a broker.

Under a share purchase plan (SPP) a company's existing shareholders are invited to buy more shares, normally at a discount to the current share price.  Just like DRPs discussed above, there is no brokerage or other commissions payable on the share purchase as you are transacting directly with the company.

However, also like DRPs, you need to be an existing shareholder of the company.

Rights Issues

Rights issues are similar to share purchase plans in that you can buy additional shares in a company without paying any brokerage.  The main difference to a SPP is that under a rights issue, the number of shares you're entitled to is in proportion to your current shareholding, whereas with a SPP this is not the case.

Share Floats/IPOs

When a company first lists on the Australian Stock Exchange, they normally offer shares to the public as a way of raising capital.  Once again, since you are transacting directly with the company you will pay no brokerage.

If you are interested, here is a list of upcoming share market floats.

Saving A Little Could Cost You A Lot

As I said at the beginning of this article, I don't believe that saving money on brokerage fees should be a primary factor in your decision of which shares to buy.  Saving $20 or so in stock broker's fees may turn out to be false economy if the underlying investment does poorly.

What do I mean?  Well, each of the cases I've described above are very specific and somewhat opportunistic.  If it were me constructing a share portfolio, I wouldn't be restricting my purchases to DRPs, SPPs, rights issues and new floats.  I'd be looking for companies trading at attractive prices at the time I was ready to purchase.

So there is your long answer.  You can buy shares without a broker.  But not just any shares and not all of the time.

Read more about how to buy shares.

Thursday, November 8, 2012

Why I Don't Like Dividend Reinvestment Plans

In my last post I discussed dividend reinvestment plans.  I know they are popular with some investors - in fact a quick search on Google yielded a number a websites devoted entirely to dividend reinvestment.  And while I can understand the attraction for some investors, DRPs are not for me.

So in this post I will discuss some of the disadvantages that I see with these plans.

To recap, a DRP allows existing shareholders to increase their holding by forgoing their cash dividend payments in exchange for new shares in the company.  There is no brokerage payable and to top it off, the shares are sometimes issued at a discount to the current market price.

So what's not to like?

Don't get me wrong.  There's nothing fundamentally wrong with dividend reinvestment plans.  It's just that they don't suit me.

Buying Shares When I Want To

I like to choose when and where I invest my money.  Dividend reinvestment limits my ability to do that.

Under most plans, shares are issued a couple of times each year at whatever the market price happens to be when the dividend is paid.  It could be that at the time the shares are issued (and therefore the price is set) I consider the shares to be too expensive.  There could be another company I'd rather invest my money in.  Or I might consider the market overall to be too high.  I might like to hold onto the cash for a while until a suitable investment opportunity arises.

By participating in dividend reinvestment plans, I lose that flexibility - the flexibility to buy the stock I want at a price I think is reasonable.  Instead, I have to take whatever the market says the price should be at the time the dividend is paid.

Too Much Paperwork

When you're being allocated small parcels of shares, a couple of times each year, under multiple DRPs - there's a lot of stuff to keep track of.

While this may seem trivial to those of you with superhuman powers of organization, for the just of us it can be a real hassle.

I admit it.  I'm not terribly well organized.  I love researching little-known companies, reaching for value in obscure places and relaxing while watching my stock portfolio grow.  But the administration side of things bores me to tears.

I dread tax time - the time when I need to find all of the documents which tell me which shares I bought and sold, at what price and when.  And this is where dividend reinvestment plans can be a pain.  Imagine I own shares in a company for 10 years and in each of those years the company pays 2 dividends and for each of those dividends I participate in the DRP - that's 20 individual purchases, plus the initial purchase.  That's 20 different capital gains calculations (I still do my own tax).  That's a nightmare.

Okay.  So maybe I could be a little more organized.  Maybe then tax time wouldn't be such a pain.  But it's still something you need to think about.

Don't Just Buy For The DRP

There are lots of factors to look at before making an investment in the share market. If you do like the idea of dividend reinvestment, by wary of allowing this the cloud your judgement.  With any prospective investment I'm always weighing up the price I have pay against the value I'll get.  To me, DRPs are a very small part of the value side of the equation.

I'll leave you with one last thought.  If you elect to take your dividends in cash like I do, then make sure you don't let them go to waste.  I make sure any income from dividends gets held separately from my day to day spending money.  I still want to reinvest them - just on my own terms.

As I said at the beginning of this post, I know that dividend reinvestment plans are popular amongst some investors.  I'd be curious to hear what others think.  Do you like DRPs?  Why? Or why not?

Tuesday, November 6, 2012

What Is A Dividend Reinvestment Plan?

Dividend reinvestment plans (or DRPs) offer investors a way to gradually increase their stake in a company.  Instead of receiving a cash dividend payment, investors receive an equivalent amount in the form of new shares in the company.

You Don't Have To Participate

Dividend reinvestment plans are voluntary.  By default you will not participate in the DRP and will instead receive all of your dividends in cash.

If you would like to participate in a company's DRP, you will need to notify the company.  They will normally send out the forms not long after you buy your initial shares in the company, or in the lead up to a dividend payment.

In addition, most plans allow you to receive only part of your dividend payment in the form of shares with the balance received as cash, if that is something you're interested in.

Cost Effective

One of the main benefits of dividend reinvestment plans is that there's no brokerage fees payable.   This means that you can grow your investment in a particular stock gradually over time without paying any commissions.

Another benefit with some plans is that they issue the new shares at a discount to the current share price.  Discounts are normally around 2.5% or 5%.

An Example

Let's look at a real world example.  Woolworths (ASX:WOW) most recent dividend payment allowed investors to reinvest their dividends at a price of $28.882297 per share.  The amount of the dividend (per share) was 67 cents.

If you held 300 Woolworths shares at the time the dividend was paid, you would be entitled to 6 new Woolies shares.  How does it work?
  • Total dividend paid:  $201
    This is the total amount of the dividend to which you are entitled (300 shares by 67 cents).
  • Shares issued:  6
    This is the number of new shares to which you are entitled under the DRP ($201 divided by $28.882297, rounded down).
  • Total cost of new shares:  $173.29
    This is how much the new shares cost.
  • Amount carried forward:  $27.71
    This amount is held by the company and is added to the dividend amount used in the next issue of shares under the DRP.
The "Amount carried forward" figure above may need some explanation.  Dividend reinvestment plans only operate in whole numbers of shares.  Since the cost of the shares issued almost never matches the amount of the dividend, the leftover amount is held by the company to be used for the next dividend.

Tax Implications

Even though you don't actually receive the dividends in cash, you still need to include them on your tax return as income.  You are also entitled to and franking credits.  (Please note, this is just my understanding how Australian tax law operates with regard to dividend reinvestment plans.  However I'm not a qualified tax professional so make sure you get your own advice.)