One thing that irritates some stock traders is the practice of paying for the ability to trade on market exchanges through commissions or fees. Is it possible to avoid paying commissions altogether? Through DRIPs and commission-free trading plans, the answer could be yes.
Why Pay Commissions?
This stems from the traditional practice of having to send your trade requests into the market through a licensed stockbroker – an actual person who would place the order and also deliver financial consultation and recommendations for your choices. Having a commission for that kind of interaction was understandable; these are professionals who were trained to help you make financial transactions that normally you wouldn’t be able to make.
With the creation of online trading, though, investors suddenly weren’t tethered to the traditional stockbroker option. They could instead go through an online brokerage and skip a lot of the hefty commissions that were charged. Instead of paying several percent off the top per trade, you could instead pay a low set fee – today as low as $3.95 in some cases. This encouraged the flood of individual trading that is the norm today.
Still, paying commission for some isn’t good enough, even if they are cheaper than they used to be.
Avoiding Commission With DRIPs
One solution to avoid paying commission on every trade you make is to invest in a DRIP – or a dividend reinvestment program/plan. This is an option that basically allows you to take whatever you would have gotten from a quarterly dividend – or payment to shareholders made from excess profits – and reinvest it into the company. The result – You receive more shares.
The beauty of a DRIP from a commission perspective is that most are commission-free. Since you already own the stock, you can just roll what would’ve been your dividend payment into your account to buy more shares.
Another great thing about a DRIP is that it allows you to benefit from dividends while also benefiting from the stock’s value increasing over time. All of this is, again, without commissions.
There are, as you probably can guess, several types of DRIPs out there, and some companies many not offer any at all. Plus, some plans may actually still charge fees or commission (but there are enough that don’t that you won’t have a problem finding one that is commission-free). One drawback? You have to keep track of the cost basis – how much each share was originally worth when you bought it – for what could be dozens of share lots (blocks of shares with the same value that you buy at once).
For example, let’s say you buy 1,000 shares of Company X for $10 a share. The cost basis for this specific share lot is $10,000. Then, you receive dividend returns of $0.50 per share, which would give you a return of $500 – which is reinvested through your DRIP. At this time, though, the price went up to $10.50, so you can buy 47 shares. For tax purposes, you’d report a capital gain of $500 on your original investment.
Next quarter, the price is at $11. You receive a dividend of $0.40 per share, or $418.80 (1,047 * $0.40) That is reinvested, so you can purchase 38 shares. You now have three cost bases to keep track of: the first, which has earned you $1,000; the second, which has earned you $23.50; and the third, which will earn (or cost) money as the stock rises (or falls).
That can be complicated and costly if you use an accountant, but in the end, DRIPs remain popular and will continue to provide a solid option for those who want to avoid commission and make use of dividends.
Can You Find Commission-Free Trading Online?
The answer to this question used to be ‘yes’. In fact, around 2007, several online brokerages and traditional brick-and-mortars began offering commission-free trading, hoping that the loss of revenue from no commissions would be made up by advertisements or by traders choosing to take part in other financial services offered by these institutions.
Over time, though, these offers were pared back, to the point where now you can only hope to get a set number of trades per month or year that are commission-free – and pay a flat rate on the rest. Fidelity Investments, for example, still offers up to 200 commission-free trades. You can also trade certain exchange-traded funds (ETFs) through some institutions without having to pay commission, provided that the ETF is owned by the institution. Vanguard, for example, lets you trade its own ETFs without paying commissions, but charges for other, non-Vanguard ETFs.
In the end, paying commission is a fact of life for virtually every trader out there. The good news? Trading today is incredibly cheaper than it used to be before the advent of mainstream online brokerages. While you’ll have to pay a small amount per trade, these fees are usually flat fees and don’t scale up percentage-wise like actual commissions from brick-and-mortars and brokerages from yesteryear.