Generally speaking, there are four main ways for an individual investor to buy stocks.
- Through a stock broker (full-service broker or discount broker).
- Through a bank.
- Directly from the company that issues the shares.
- Directly from the current owner of the shares.
Important: If you buy a security in bearer form and lose it, you’re out of luck. However, most companies will issue securities in registered form today. If you lose a registered security, a new certificate can be issued for you by the issuer.
Buying stocks from a stock broker
Buying stocks through a stock broker is the most common way to do it. Stock brokers tend to be full-service or discount (DIY). Both options have their advantages and disadvantages, and you can read more about them in our article ”Chosing a stock broker”. Traditionally, stock brokers have charged a commission (fee) on each stock transaction, but there are no-commission alternatives available today.
Buying stocks from a bank
Some banks allow their clients to buy and sell stocks in individual companies through the bank, but it is much more common for banks to offer shares in mutual funds instead. If the bank offers both options, you can expect them to try to steer you towards the mutual funds or other pre-packaged solutions. The selection of mutual funds is often rather limited, since the bank will offer only its own mutual funds or its own mutual funds + mutual funds from a select group of partner companies.
Buying stocks directly from the issuer
Buying stocks directly from the issuer can be a bit more complicated than buying through a broker or bank, since you need to set up the transaction with each individual issuer that you wish to buy from. After this initial work, buying stock from the issuer is typically a very straightforward procedure and it does have its advantages over going through a middleman.
When you buy stock directly from the issuer, there is usually no room for price negotiations. The price is set by the issuer and you can just accept it or not. When you instead buy stocks on the second-hand market (e.g. through a broker) you can put in an order that will be executed when (if) the price drops to a certain point. Of course, there is always the risk of the stock going up up up after being issued, forcing buyers on the second-hand market to pay more for the stock than what it was originally sold for by the issuer.
DRIPs and DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans through which shareholders are allowed to purchase stock directly from the issuer. With a DRIP, the money you would receive in the form of dividends never reach you – they are automatically used to purchase more stock in the company. In some jurisdictions, there are certain tax benefits associated with this method of procuring stocks.
Many stock brokers allow you to arrange a DRIP or DIP through them; you don’t have to deal directly with the issuer. Some brokers even offer artificial DRIPs, where dividends are used to immediately purchase stocks on the open market instead of directly from the issuer.
Buying stocks from an investor
You can buy stocks directly from its current owner, e.g. an individual or a company. Just like other stock trades that takes place outside stock exchanges, this is known as over-the-counter (OTC) trading. And just as with other forms of OTC trading, you will not get the added level of security offered by an exchange. (It should be noted that for stocks that aren’t listed at any exchange, OTC trading is the only available form of trading.)
There are forums and similar available online where prospective buyers and sellers congregate to find each other. This makes direct purchases easier than in the past, where an individual’s exposure to prospective sellers was smaller. Naturally, it has also opened up new venues for scammers and fraudsters.
Some stock market places available online are quite advanced, without being fully-fledged stock exchanges subjected to stock exchange-specific laws and regulations. They may for instance have automatic matching features similar to those offered by stock exchanges. You can put in an order and use features such as fill-or-kill, all-or-none and immediate-or-cancel. Some even offer stop-loss.
Compared to stock exchanges, the liquidity is typically much lower and you may have to wait a long time to match up with a suitable buyer or seller.