DRiP Primer
Avoid Excessive Fees: Buy Stocks Without a Broker
Until May 1, 1975, brokerage commissions were set at a fixed rate which was used by all stockbrokers. On that date, the SEC deregulated the commissions charged by the brokerage industry and the discount brokerage industry was born. Before deregulation, it could cost an investor hundreds of dollars per stock trade. Since 1975, the average investor has seen his cost of trading fall from $500 to $100 to $50 to $20 and now to $10.
While brokerage commissions have declined significantly over the past 35 years, they can still be prohibitive to small investors. The average retail investor – that’s you – trades stock once a month. If you assume that each trade costs $10, that’s $120 per year in commissions to your stockbroker. If you could avoid those fees and reinvest them into your own stock portfolio, then that $120 would be worth almost $260 in 10 years. Now, imagine reinvesting those savings every year.
The following chart compares the performance of two investing strategies since 1999. The first strategy (green line) represents an investor who chose to invest $100 per month in a no-fee dividend reinvestment plan. After almost 12 years, the value of this investor’s portfolio rose to more than $18,000. The second strategy (blue line) represents an investor who chose to invest $100 per month in a stock using a discount stockbroker. The discount broker charged the investor $10 per trade, so the investor actually only had $90 per month to invest. After almost 12 years of investing, the value of this investor’s portfolio rose to only $16,300 – 10% less than the value of the DRiP investor’s portfolio.
The longer your investing time horizon, the more you will benefit from investing with DRiPs and avoiding excessive stockbroker fees and commissions. As we pointed out in our DRiP Primer introduction, we are determined to help individual investors take control of their own financial futures. We don’t like stockbrokers, nor do we trust them – plain & simple.
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