Young investors are understandably wary about investing in the stock market. The financial crisis of 2008 severely disrupted our formative professional years, and its spectre still lingers a decade later. Only 33 percent of millennials own stock, according to a 2016 Bankrate survey based on 1,000 telephone interviews, while a 2015 Harvard University survey found that just 14 percent of millennials trust Wall Street.
In addition to this lack of confidence in brokers, many millennials don’t have the startup cash to fund an IRA or a brokerage account, which typically require either automatic monthly payments or a minimum investment of around $1,000-2,500, plus commission fees of around $4-7 for every trade. Over the last few years, there has been a gradual uptick of young investors who are wading back into the stock market, but considering most millennials have less than $1,000 saved up, the barriers to entry can still seem too high.
For those people, one option for getting started as a shareholder might be to check out direct investment plans, a method of purchasing stock straight from a company, without input from a broker. These plans are definitely not as convenient as getting a broker—you can’t just buy and sell a variety of company stocks at any time, for instance. Plus, you won’t have a very diverse portfolio if you only own stock from a few companies, and with some plans, you won’t even escape fees, so you have to be careful about what you sign up for.
That said, direct stock plans are a good way to experiment with the stock market without putting too much skin in the game.
The first time I ever bought stocks, for example, I was in my early 20s, knew nothing about investing, and had no more than $200-300 of spare cash each month after my living expenses were paid. Out of curiosity, I enrolled in Disney’s direct investment plan, one that currently requires $175 in initial funding, and I sent that fee to the company directly with the application.
As a total noob, the only reason I selected Disney was because I was familiar with the creative product, not because I was working for the company or had any clue about its market future. I also couldn’t afford to put in anything more than the minimum—if I recall correctly, it was $50/month—so I earned very little on the plan.
But still, getting a sense of the rate of return from the statements sent by the company—even it just showed a few dollars—was a good learning experience about the wider market, that informed how I invested going forward.
For one thing, I felt the sting of selling at the wrong time. I closed the account around 2011, when it was only worth a few hundred dollars, because I was short on cash. Disney’s stock has since been rising as it eats other entertainment giants like Marvel, Lucasfilm, and most recently 21st Century Fox. While I would not have earned much through my account, because the balance was so low, it would’ve been great to see the returns pick up nonetheless.
The experience also made me switch to investing through an IRA once I could afford it, because I realized I didn’t have a real talent for optimizing returns through directly purchased stocks and preferred the convenience of automatic investing.
But for those who have a cannier eye than mine for promising companies, a direct stock plan might be a good fit. According to the US Securities & Exchange Commission, these broker-free plans come in two main varieties—direct stock plans (DSPs) and dividend reinvestment plans (DRIPs). DSPs pay out cash dividends, while DRIPs automatically reinvest dividends in more company stock to compound returns. Many companies offer both types of plans, but often you have to enroll in a DSP if you’re new to buying stocks from the company, while DRIPs are for existing shareholders.
Hundreds of companies offer these plans, but each has its own rules for eligibility, so if you are thinking of buying stock from them, be sure to read and understand their terms. Also, though these plans allow you to dodge brokers fees, many of them charge enrollment fees, so be prepared for some upfront costs when purchasing stock from the company.
It’s natural to be wary about investing in stocks, given recent history. But NerdWallet estimates that the average millennial would lose about $3.3 million in retirement savings by avoiding it completely. Direct stock plans are an easy way to learn the basic ropes and establish a portfolio, without splurging on brokers.
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