Other Ways to Buy and Sell Stocks and Bonds

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The last post explained buying and selling stocks and bonds through brokers.  Now I will look at other popular ways to put your investment dollars to work through online services, direct purchases, mutual funds, and registered investment advisors (RIAs).

Online Services

More firms now offer ways for you to trade stocks and bonds with a click of the mouse.  Some are connected with long-established brokers; others are only online.  Many offer you tools to help. Mostly these tools process information.  With them you can organize your thinking, but none can offer the key ingredient of any investment decision: judgment in the face of uncertainty.  These firms typically make their money from trading fees that are sometimes lower than full-service brokers and sometimes even lower than discount brokers.  Some fees are set as a flat amount per trade instead of a percentage of the total value of stocks or bonds traded.  The drawback of online brokers: like discount brokers, they offer no advice beyond their online information management systems.  Many limit the choice of securities you can buy and often do not trade bonds or have severe limitations on what sorts of bonds you can trade.

Direct Purchases

You can also buy securities directly from some issuers.  The U.S. Treasury offers a way to buy bonds in addition to the savings bonds mentioned in an earlier post. There are no fees, and you can buy online through Treasury Directat www.treasurydirect.gov. This system does not enable you to sell your treasury bonds back to the government.  Should you need to sell, you would have to transfer the bonds into a brokerage account and use that broker’s services.  Nor does Treasury Direct give you a full accounting of your holdings.

Some larger companies allow you for a small fee to buy their stock issues directly. These arrangements may also offer direct reinvestment plans (DRIPs) wherein you can buy additional stock by reinvesting the dividends paid on your existing holdings.  Some of these purchase programs may even offer a discount from the market purchase price, sometimes as much as 3 to 5 percent.  You can find out about these from the company’s website.  Each company has its own rules about how many shares you must buy initially.  If you already own some of that company’s shares, they usually offer a way for you to transfer them into the plan.  All these direct plans have ways for you to sell back your shares, usually only at set intervals determined by the company.  For a complete list of companies that offer DRIPs and their terms see www.dripinvestor.com.

Mutual Funds

 These are a popular, efficient, and usually cost-effective way to invest in stocks and bonds (and sometimes more exotic financial instruments of which more in a later post).  Mutual funds enable you to employ professional management services at relatively little expense and with relatively little in assets.  They do not substitute for a broker.  Rather, they hire a broker to put through the trades the funds make on your behalf.

Mutual funds effectively offer you a share of a professionally managed portfolio of stocks or bonds, sometimes both.  They spare you the need to do any trading on your own.  For this service, and of course their investment expertise, they charge fees, including a small or fractional percentage of the value of your holdings.  Funds come in four varieties:

  1. No Load Funds: You buy these directly from the fund company, which charges nothing to buy into the fund, but does charge a management fee, a small percentage of the amount they hold for you.  (There may be other fees as well: see the box at the end of this post.)  Most brokers will not buy these funds for you, though many full-service brokers will provide custody and accounting for those you have bought for yourself.
  2. Load Funds: In addition to management fees, as in no-load funds, these also charge a fee when you buy into or out of the fund. The fees are levied in various ways. (See the box at the end of this post.) Load funds claim superior performance to justify these expenses, though many studies show little performance difference between load and no-load mutual funds.  You can only buy load funds through brokers.
  3. Closed-End Funds: The two kinds of mutual funds I just discussed are called open ended.  They buy and sell stocks and/or bonds, and their size, called net asset value (NAV), expands and contracts according to the market value of all their holdings.  In contrast to the previous two, closed-end funds manage a portfolio of securities that then trades on the market just like the stocks of corporations.  Think of it as buying a share in a highly specialized investment company, but one in which you have no voting rights.  The value of these shares can rise and fall, sometimes exceeding and sometimes falling below the market value of their holdings.  These, too, can only be bought or sold through a broker.
  4. Exchange-Traded Funds (ETFs): These are a subcategory of closed-end funds. They are established on the stock exchanges and based on a particular investment style or sector — energy stocks, for instance, or small companies or a segment of a market index or an entire market index.  They, too, are bought and sold only through brokers.  Some online brokers specialize in ETFs.  These specialists can offer a discount in trading because they recieve fees from the issuers of the ETFs.

Registered Investment Advisors (RIAs)

RIAs are independent teams of investment professionals whom you can hire to invest your funds.  They communicate frequently with their clients to explain what they are doing and why.  They usually impose relatively high minimum investment amounts and relatively high fees for what amounts to a personalized service.  They have to work through brokers to buy and sell for you, and you pay the brokerage costs.  RIAs are best suited to people with large pools of assets with either complicated investment needs or complex administrative and ownership structures.


Mutual funds have many different styles, some aggressive, some more conservative, and many different investment objectives.  Some funds specialize in bonds, some in stocks, some in combinations of the two.  Some seek income, while others stress price appreciation.  Some focus on small stocks, some on large stocks, some on growth, some on value.  Some have an aggressive approach, some a cautious one, and some a passive structure. (More on these distinctions in coming posts.)  Some specialize in sectors or industries.  Others specialize in different sorts of bonds, such as junk, municipals, high-grade credits.  A complete list would go on for pages.  Deciding what is right for you takes study and hard thinking about your risk tolerances and your needs.  One could build an entire portfolio out of specialized funds.  By contrast, RIAs generally take a broader approach.  Deciding which to use depends in large part on whether they are flexible enough and responsive enough to fit your needs.

Your choice of a mutual fund or RIA should depend on three criteria:

  1. How well its objectives fit yours.
  2. How well it accomplishes its goals, the performance of the fund relative to other funds and the index of stocks or bonds that best matches its objectives, or as financial people would say, it benchmarks itself.
  3. What fees it charges (to see whether the performance can justify the cost.)

With mutual funds, all this information — including their style, limitations, objectives, emphases, and performance — is available in the prospectus they are required by law to make available to you.  With RIAs, judgments on flexibility and levels of service rest with you, but otherwise they should provide you with an audited record of their investment track record so you can decide if they are worth their fees.  It is not just how well they do in absolute terms. Because all investment portfolios are built around different objectives and levels of aggressiveness, all performance must be benchmarked against portfolios with similar mixes of objectives and risk levels.  (More on these important considerations in a later post.)


Load Mutual Fund Expenses:

  • Front-End Load: You pay a sales commission when you buy the fund.  These fees can range widely, and you would be well advised to find out what they are before you buy.  Your broker can inform you, as can the fund’s prospectus or the mutual fund company’s website.  Such mutual funds usually charge less if you buy larger quantities.  The industry calls these points of difference break points.
  • Back-End Load: In lieu of a sales commission, these charge a fee if you sell before a specific period, usually some number of years. The fund company frequently waives this fee if you change to another one of their funds.  Back-end fees are less popular today than they once were.
  • Redemption Fee: This is a fee to discourage frequent trading and is charged, in addition to other fees, when you sell, typically if you do so in less than a year after purchase.
  • 12b-1 Fees: Named after the section of the federal law that allows these fees, these are charged to you to pay for some of the fund company’s sales and advertising expenses.  These, too, can range widely.
  • Fund companies charge fees for different classes of holdings. Check to see which fees apply to you.




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