While the stock markets provide the means for the vast majority of stock trades, there are avenues of acquisition that are more direct. In other words, there are ways of purchasing stock directly from the issuing companies, often without paying a commission or even having a broker involved at all.
New Issue Stock
Stock purchased via a market, using a broker (online or otherwise) always involved the acquisition of, in effect, used stock. You are not buying shares from the company – they get not one dime of your money when you buy their stock – but rather, you are buying from another investor who holds the stock and is selling it.
However, when companies issue new stock the mechanism is different. In this case they sell new shares through investment bankers, who then market them to the public without the shares having yet touched a stock market. The broker doesn’t charge the investor a fee, but rather, makes their money from the issuing company.
In this case the issuing company does get your capital, though it happens through the middle-entity of the broker. It’s close to a direct purchase, if you allow for the fact that a broker touches the transaction.
Company Investment Programs
Many companies allow employees to purchase stock directly from them. This takes place through various types of employee stock purchase plans or 401k retirement plans that include an option to acquire stock and using company-funded matching funds paid with shares rather than dollars.
In this case the company deals directly with the shareholder using their own administrative resources, and pockets the capital directly.
Private Placements
Non-listed companies often raise capital by selling blocks of stock directly to investors. With start-ups this is sometimes called “angel money,” with investors supplying the capital necessary to form the company and plan to begin operations.
Sometimes this occurs after the company is up and running to finance further growth. In this case the investors are often found to be within a network of existing relationships, and while it may involved a broker or investment banker, it also can happen without one.
Upside, Downside
The primary benefit of purchasing stock directly is the avoidance of commissions or fees. The downside of investing directly in a new company is the risk of its ability to get traction in its market and the unknown quality of its management.
And while the risk of investing directly with known firms through new-issue stock may be less, investors should know that new stock dilutes the value of all shares through the increased number of outstanding shares, resulting in a watered down earnings-per-share ratio.
