How to Become a Direct Stock Investor


What does McDonald's, the restaurant chain,
have in common with Fidelity mutual funds?

Or,
Exxon, the leading oil company,
with T. Rowe Price mutual funds?

Or,
Procter & Gamble, the consumer-products company,
with Vanguard funds?

Or,
U S West Communications,
one of the seven regional Bell telephone companies,
with Janus funds?



On the surface, it appears that these companies have nothing in common with these no-load mutual funds, especially when it comes to making purchases in these two types of investments.
Contents of this document:

No-load mutual funds allow you to deal directly with the fund family,
without using a broker or paying commission.

On the other hand, stocks such as McDonald's, Exxon, Procter & Gamble, and U S West require you to use a broker to make your purchases, right?

Well, you might be surprised to learn that McDonald's, Exxon, Procter & Gamble, and U S West are just four of the growing number of companies in which investors may buy their first share and every share of stock directly from the firm - without using a broker. McDonald's, Exxon, Procter & Gamble, and U S West are what I call No-Load Stocks.

What's a No-Load Stock? Contents

No-load stocks share many of the features that are usually associated with no-load mutual funds. The most obvious common trait of no-load mutual funds and no-load stocks is that both are purchased without using a broker or paying brokerage commissions in many cases. In both cases, investors deal directly, via the mail.

The process for buying no-load stocks is the same as buying no-load mutual funds:

And that's it.

In most cases, your initial investment will automatically enroll you in the company's dividend reinvestment plan and/or stock purchase plan. With these programs, you can have your dividends reinvested as well as make additional cash investments to purchase more shares.

Low Investment Minimums Contents

A big reason mutual funds are so popular with small investors is that they don't require huge investments to get started. Fortunately, no-load stocks have taken their cue from the mutual-fund industry and have made their minimum initial investments quite affordable, usually $50 to $500.

What's nice about such low minimums is that an investor can diversify among several no-load stocks with very little money.

Below is a list of all no-load stocks which have open enrollment (available to investors in most or all 50 states) along with their initial investment minimums:

CompanyMinimumCompanyMinimum
ABT Building Products$250 AFLAC$750
AirTouch Communications$500 American Recreation Centers$100
Amoco$450 Arrow Financial$300
Atlantic Energy$250 Atmos Energy$200
Augat$250 Bard C.R.$250
Barnett Banks$250 Bob Evans Farms$50
Capstead Mortgage$250 Central & South West$250
Central Vermont Public Svc.$50 CMS Energy$500
COMSAT$250 Crown American Realty Trust$100
Dean Witter, Discover$1,000 DeBartolo Realty$500
Dial$100 DQE$105
DTE Energy$100 Duke Realty$250
Eastern Co.$250 Energen$250
Enron$250 Exxon$250
First USA$1,000 Hawaiian Electric Industries$100
Home Properties$2,000 Houston Industries$250
Integon$500 Interchange Financial Svcs.$100
Johnson Controls$50 Kellwood$100
Kerr-McGee$750 Madison Gas & Electric$50
McDonald's$1,000 MidAmerican Energy$250
Mobil$250 Morton International$1,000
NorAm Energy$200 Oklahoma Gas & Electric$250
Oneok$100 Philadelphia Suburban$500
Piedmont Natural Gas$250 Pinnacle West$50
Portland General$250 Procter & Gamble$100
Reader's Digest$1,000 Regions Financial$500
SCANA$250 Tenneco$500
Texaco$250 Tyson Foods$250
U S West Comm. Group$300 U S West Media Group$300
Urban Shopping Centers$500 UtiliCorp United$250
Western Resources$250 Wisconsin Energy$5
WPS Resources$100 York International$1,000

Below is a list of no-load stocks which have certain restrictions on enrollment, along with their initial investment minimums: Contents

CompanyMinimumCompanyMinimum
American Water Works$100 Bancorp Hawaii$250
BanPonce$25 Boston Edison$500
Brooklyn Union Gas$250 Carolina Power & Light$20
Cascade Natural Gas$250 Centerior Energy$10
Central Fidelity Banks$100 Central Hudson Gas & Electric$100
Central Maine Power$25 Connecticut Energy$250
Connecticut Water Service$100 Delta Natural Gas Company$100
Dominion Resources$20 Duke Power$25
Enova$25 Florida Progress$100
Green Mountain Power$50 Idaho Power$10
IES Industries$50 Interstate Power$50
IWC Resources$100 Minnesota Power & Light$10
Montana Power$100 National Fuel Gas$200
Nevada Power$25 New Jersey Resources$25
Northern States Power$100 Northwestern Public Service$10
NUI$125 Puget Sound P&L$25
Southwest Gas$100 Union Electricno minimum
United Cities Gas$250 United Water Res.$25
WICOR$100


And not only do no-load stocks make it easy to get started by having low investment minimums for the initial purchase, they make it even easier to continue accumulating stock over the long term. In general, investment minimums for subsequent purchases in no-load stock programs are $10 to $100. The beauty of such low minimum requirements is that you can add to all of your no-load stock holdings with a relatively small investment each month.

If you have deeper pockets, no-load stocks are still an attractive investment option. Like mutual funds, which permit huge investments, most no-load stocks have maximum investment amounts that will be adequate for nearly every investor. For example, Exxon permits annual investments of up to $100,000. And remember - other than a no-load mutual fund, where else can you invest such large sums of money and pay virtually no commissions?

Below are the minimum and maximum investments permitted by no-load stocks once you've enrolled in their stock purchase plans: Contents

CompanyMinimum-Maximum
ABT Building Products$50-$100,000 per year
AFLAC$50-$120,000 per year
AirTouch Communications$100-$10,000 per transaction
American Recreation Centers$25-$5,000 per month
American Water Works$100-$5,000 per month
Amoco$50-$150,000 per year
Arrow Financial$50-$10,000 per quarter
Atlantic Energyup to $100,000 per year
Atmos Energy$25-$100,000 per year
Augat$100-$100,000 per year
Bancorp Hawaii$25-$5,000 per quarter
BanPonce$25-$10,000 per month
Bard (C.R.)$25 min./no max.
Barnett Banks $25-$10,000 per month
Bob Evans Farms$10-$10,000 per month
Boston Edison $50-$40,000 per year
Brooklyn Union Gas$25-$100,000 per year
Capstead Mortgage$50-$10,000 per month
Carolina Power & Light$20-$2,000 per month
Cascade Natural Gas$50-$20,000 per year
Centerior Energy$10-$40,000 per year
Central Fidelity Banks$25-$10,000 per month
Central Hudson Gas & Electric$25-$10,000 per quarter
Central Maine Power$10-$40,000 per year
Central & South West$25-$100,000 per year
Central Vermont Public Service$50-$2,000 per month
CMS Energy$25-$120,000 per year
Comsat$50-$10,000 per month
Connecticut Energy$50-$50,000 per year
Connecticut Water Service$100-$3,000 per quarter
Crown American Realty Trust$100-$5,000 per quarter
Dean Witter, Discover & Co.$100-$40,000 per year
DeBartolo Realty$50-$30,000 per quarter
Delta Natural Gas$25-$50,000 per year
Dial$10-$5,000 per month
Dominion Resourcesup to $50,000 per quarter
DQE$10-$60,000 per year
DTE Energy$25-$100,000 per year
Duke Power$25-$20,000 per quarter
Duke Realty Investments$100-$5000 per month
Eastern$50-$150,000 per year
Energen$25-$100,000 per year
Enova$25-$25,000 per quarter
Enron$25-$120,000 per year
Exxon$50-$100,000 per year
First USA$100-$3,000 per month
Florida Progress Corp.$10-$100,000 per year
Green Mountain Power$50-$40,000 per year
Hawaiian Electric Industries$25-$100,000 per year
Home Properties of NY$50-$5,000 per month
Houston Industries$50-$120,000 per year
Idaho Power$10-$15,000 per quarter
IES Industries$25-$120,000 per year
Integon$50-$120,000 per year
Interchange Financial Services$25 min./no max.
Interstate Power$25-$2,000 per month
IWC Resources Corp.$100-$100,000 per year
Johnson Controls$50-$15,000 per quarter
Kellwood Co.$25-$3,000 per month
Kerr-McGee$10-$3,000 per quarter
Madison Gas & Electric Co.$25-$25,000 per quarter
McDonald's Corp.$100-$250,000 per year
MidAmerican Energy Co.$25-$10,000 per month
Minnesota Power & Light$10-$10,000 per quarter
Mobil$10-$7,500 per month
Montana Power$10-$60,000 per year
Morton International$50-$60,000 per year
National Fuel Gas$25-$5,000 per month
Nevada Power$25-$25,000 per quarter
New Jersey Resources$25-$60,000 per year
NorAm Energy $25-$60,000 per year
Northern States Power$25-$10,000 per quarter
Northwestern Public Service Co.$10-$2,000 per month
NUI Corp.$25-$60,000 per year
Oklahoma Gas & Electric$25-$100,000 per year
Oneok$25-$100,000 per year
Philadelphia Suburban$25-$10,000 per year
Piedmont Natural Gas$25-$3,000 per month
Pinnacle West Capitalup to $60,000 per year
Portland General$25-$75,000 per year
Procter & Gamble$100-$120,000 per year
Puget Sound P & L$25-$100,000 per year
Reader's Digest Association$100-$10,000 per month
Regions Financial$25-$10,000 per month
SCANA$25-$100,000 per year
Southwest Gas$25-$50,000 per year
Tenneco $50-$60,000 per year
Texaco$50-$120,000 per year
Tyson Foods$50 min./no max.
Union Electricup to $60,000 per year
United Cities Gas$25-$10,000 per quarter
United Water Resources$25-$3,000 per quarter
U S West Communications Group$25-$100,000 per year
US West Media Group$25-$100,000 per year
Urban Shopping Centers$50 min./no max.
UtiliCorp United$50-$10,000 per month
Western Resources$20-$60,000 per year
WICOR$100-$10,000 per month
Wisconsin Energy$25-$50,000 per quarter
WPS Resources$25-$100,000 per year
York International$100-$10,000 per month


Regular Statements/Record-Keeping Assistance Contents

Another way no-load stocks and mutual funds are similar is in the regular statements each sends to their investors. Companies with no-load stock programs send a statement to investors after every investment. The statement shows the number of shares purchased, the purchase price, the total number of shares held in the account, and, in some cases, the total value of the shares. Companies also provide a year-end statement to assist you at tax time.

Direct Ownership Contents

When you buy shares directly from a no-load mutual fund, you are the registered owner of the fund shares. That's not always the case when investors buy stock. Indeed, although this may surprise you, most stock investors are not the registered shareholders of the companies in which they invest. In fact, it's possible, indeed likely, that your company has no record of you as a shareholder. How can that be?

The fact is that, unbeknownst to many investors, their shares are held in "street" name or, in other words, in the name of the brokerage firm which purchased the shares for you.

There are two ways to own stock - in "street" name or as a registered shareholder on the books of the corporation. The identity of street-name investors is withheld from the company. All correspondence between the investor and the company goes through the brokerage firm.

The reason many investors end up with street-name accounts is because this is the method of ownership that brokers push. To be sure, holding shares in street name has certain advantages, primarily ones of convenience. The amount of paperwork is reduced since brokerage houses act as custodian of your funds, providing regular consolidated statements that help in record keeping and tax preparation. In street-name accounts, investors don't have to worry about storing certificates. Street-name ownership also makes selling easier since the shares are immediately available to the brokerage firm to sell.

The benefits of street-name ownership, however, carry a price. What you gain in convenience with a street-name account, you lose in control and flexibility. For example, want to sell your shares? If the stock is held in street name, the odds are that you'll sell through the broker who bought your shares. Thus, street-name ownership greatly reduces your ability to shop for the cheapest commissions; you are, in effect, locked in to paying the commissions of the brokerage firm where your shares are held. Sure, you can always re-register the shares in your own name, take ownership of the stock certificates, and sell the shares through any broker you'd like. However, many brokers charge dearly to register shares in the investor's name, and the reregistration process can drag on forever.

In addition to locking up an investor's assets, brokers like street-name accounts because they can earn fees from lending street-name shares to short sellers and other investors. It's perfectly legal for a brokerage firm to lend your shares if you have a margin account, just as it's perfectly legal for a bank to loan your money. And, like the bank which receives interest on loans made with your money, brokerage firms earn fees on your shares that they lend to investors.

Another cost of having stock registered in street-name is that it precludes you from enrolling in company-sponsored dividend reinvestment and stock purchase plans (DRIPs). In nearly every case, companies with DRIPs require participants to be the registered shareholder. Investors who want to buy stock directly from a company cannot do so if their stock is held in street name.

Another potential problem of owning shares in street name is that it may be difficult to receive reports from the company. A number of companies have stopped sending financial reports to brokerage firms to disseminate to street-name accounts. More companies are expected to follow suit due to high clerical, printing, and postage costs. In many cases, unless you're a registered shareholder, you could be cut out of the information flow from the company.

Missing out on special shareholder perks and discounts is another potential cost of having stock registered in street name. Many companies provide special discounts, freebies, and giveaways to their shareholders. For example, Wrigley, Wm., Jr., the chewing gum company, sends each shareholder 20 packs of gum every year around Christmas. Brown-Forman, the spirits and consumer-products company, has made available in the past to shareholders discounts on Lenox china and Hartmann luggage. In many instances, the perks are available only to registered shareholders, not street-name holders. (For further information on shareholder perks and freebies, let me plug my book, Free Lunch on Wall Street: Perks, Freebies, and Giveaways for Investors, published by McGraw-Hill and available for $14.95 plus $3 shipping and handling by calling 219-852-3220.)

Fortunately, when you buy no-load stocks, you automatically become a registered shareholder with the company, the same as if you bought mutual-fund shares directly from the fund company. As a registered shareholder, you have control over the shares. If you want to take possession of stock certificates in order to sell through a broker of your choice, notify the company and certificates will be sent immediately. And as a registered shareholder, you're assured of receiving all quarterly and annual reports.

Safekeeping Services Contents

When you purchase shares in a mutual fund, you are not sent share certificates. Rather, your holdings are recorded in book-entry form. No-load stock programs have adopted a similar system of recording ownership. Shares purchased in no-load stock programs are registered in book-entry form. There are no physical certificates. However, if a shareholder wants to take possession of the stock certificate, all he or she has to do is notify the company or its transfer agent, and a certificate will be created and sent to the investor. Such " safekeeping" services are attractive because they relieve investors from having to store stock certificates. Any of you who have gone through the hassle of getting a replacement certificate because your certificate was lost, stolen, or damaged know the value of having the shares held by the company in book-entry form.

Fractional Shares Contents

When you invest, say, $1,000 in a no-load mutual fund, all of your money is invested, regardless of the net asset value of the mutual fund. In other words, a $1,000 investment in a mutual fund with a net asset value of $23.50 will buy 42.553 shares, and the mutual fund will carry the investor on its books with an investment of 42.553 shares, fractional shares and all.

It's a different story when you buy individual stocks. Let's say you want to invest $1,000 in McDonald's, and the stock is trading at $53.25 per share. Even though your $1,000 is worth 18.779 shares of McDonald's, no broker is going to sell you fractional shares. What this forces investors to do is invest not on their own terms, but on those offered by the broker. Want to invest a full $1,000 per month in a stock, regardless of the price? You can't if you go through a broker. You'll have to invest amounts that buy whole shares.

I know some of you are probably thinking I'm making a mountain out of a molehill, but I disagree. The mutual-fund industry understands that small investors don't necessarily think in terms of how many shares they can buy each month in a stock or mutual fund; they think in terms of the number of dollars they can squeeze out of their monthly budgets to invest. The mutual-fund industry accommodates small investors by giving them an opportunity to invest their entire "budgeted" investment each and every month, regardless if the investment buys whole shares or fractional shares; the brokerage community does not. Fortunately, no-load stocks have parted ways with traditional stock investing by allowing an investor's entire investment to go toward whole and fractional shares. And no-load stocks will also allow you to purchase fractional shares with subsequent monthly purchases once you've enrolled in their stock purchase programs.

Frequent Purchases Contents

Mutual funds will accept money from investors anytime. Of course, so will brokers, but they'll also take their cut each time. One drawback of no-load stocks is that the opportunities to purchase stock each month are limited. Many no-load stocks invest money only once a month. However, that situation is changing. No-load stocks are realizing that investors want the flexibility to make more frequent purchases, especially if a stock drops in price. Thus, several no-load stock programs have instituted more frequent purchases. Exxon and McDonald's, for example, will buy shares once a week for investors in the stock purchase program, and McDonald's may buy shares daily if practical. Look for more no-load stocks to institute weekly and perhaps daily purchases over the next few years.

Frequent Sells Contents

Selling a mutual fund is easy - just a phone call in many instances. And in most cases, no fees are charged for selling mutual-fund shares. Selling stock through a no-load stock program, unfortunately, is not as easy. In most cases, the companies require a sell notice in writing, and it may take five to 10 business days to sell the shares and additional time to remit the funds to the investor. In addition, most no-load stocks charge fees to sell shares for investors, although these fees are still smaller than traditional brokerage commissions. Fortunately, the situation is improving. A number of newer no-load stock plans now offer telephone redemptions. As no-load stock programs become more mainstream and companies become more comfortable adding enhancements to the programs, look for improvements in the speed and cost of selling shares through the programs.

Dividend Reinvestment Contents

Mutual funds give investors the option of receiving cash dividends and capital distributions or having them reinvested in the fund. As a rule, mutual funds don't charge investors to reinvest dividends. Having dividends reinvested in additional shares is an excellent way to build your investment over time. No-load stocks also give investors the option of having their dividends reinvested, and most of the firms charge no fees for providing this service.

IRA Investing Contents

Most no-load mutual funds permit investors to place their mutual-fund investments in an Individual Retirement Account (IRA), and the fund acts as the custodian for the account. Because of this feature, mutual funds offer one of the easiest ways to save for retirement.

Unfortunately, including individual stocks in an IRA is not as simple in many cases. In order to do so, you must have a custodian for the account. Brokerage firms are the usual custodians for IRAs which hold individual stocks. The problem with this arrangement is that investors incur large commissions any time they buy or sell stock in the IRA. Fortunately, a number of no-load stocks provide an option for investors to include their investments in an IRA, and the company or its agent provides custodial features. No-load stocks which offer an IRA option include Atmos Energy, Barnett Banks, Exxon, and Mobil.

The IRA feature is one of the newer wrinkles among no-load stocks, but it is one that is expected to grow over time for a variety of reasons. First, having an IRA in a no-load stock program provides an avenue for a company to gain a piece of the trillion-dollar retirement investing market. As the population continues to age, this investment segment will continue to grow in importance. A company that wants to snare retirement money for its own equity base will be more competitive if it offers an IRA program to investors.

A secondary benefit of the IRA option is the nature of the relationship between investor and corporation. Companies like a stable shareholder base, one focused on long-term investing. Such a base means that the stock will be less vulnerable to the erratic trading that sometimes occurs in stocks controlled by institutional investors, who are more short-term oriented than individual investors. IRA investing implies investing for the "long haul." An IRA program brings more long-term investors to the shareholder base, which is seen as a positive by many companies.

Automatic Investment Programs Contents

Most mutual funds offer automatic investment programs. These services allow a mutual fund to withdraw electronically a predetermined amount of money each month from an investor's savings or checking account to make regular investments in the mutual fund. Investors like such programs because they simplify the investment process, save time, reduce postage costs, and ensure that investors will invest regularly in their mutual funds.

Fortunately, several no-load stock programs offer automatic investment programs for investors. DQE, an electric utility in the western part of Pennsylvania, has an automatic investment option for a minimum $10. Exxon offers monthly automatic investments with a minimum $50. Automatic investment services have been one of the faster-growing enhancements to no-load stocks and should be more prevalent in the future.

Future of No-Load Stocks Contents

To be sure, the number of no-load stocks is still small compared to the thousands of publicly traded companies. Nevertheless, the list of no-load stocks has grown dramatically in the last two years, and growth over the next two years could be even more explosive. Indeed, regulatory changes have made it easier for companies to adopt no-load stock programs. In fact, I've been told by industry insiders that a number of big-name, blue-chip companies are preparing to offer no-load stock plans over the next 6-12 months.

No-Load Stock Clearinghouse Contents

An easy way to obtain enrollment information and prospectuses for a growing number of no-load stocks is through the No-Load Stock Clearinghouse. The Clearinghouse provides "one-stop shopping" to receive the necessary materials to get started investing in many no-load stock plans. The 24-hour hotline (1-800-774-4117) is a free call for investors. The costs of operating the Clearinghouse are shouldered by participating companies.

Investing in No-Load Stocks Contents

Of course, just because a company offers a no-load stock program doesn't make it an automatic choice for investment. Investors still need to do their homework, preferencing those no-load stocks with the best financial positions, growth prospects, and long-term potential. The following companies represent solid investments among no-load stocks.

As you can see, the new plan is quite encompassing, with such features as daily buys and frequent sells, automatic investment services, and an IRA feature. However, this increased service level comes for a price:

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