The history of stock markets in the United States is traced back to 1790, when the first stock exchange, the Philadelphia Stock Exchange, was founded after the revolutionary war that led to independence from the British rule (Callahan & Iyer, 2010). These two researchers further noted that the gradual development of the initial three banks in the United States including the First Bank of the United States, the Bank of America and Bank of New York led to the emergence of stock trade. Financial experts have defined stocks as the shares in the ownership of a particular company and hence the more stocks purchased, the greater the ownership of the buyer in the company (Investopidia, 2012). These stocks could either be common or preferred. The common stocks characterize company ownership and a claim on a certain fraction of the profits. The claim is the dividend. Preferred stock is different from the common stock in terms of limited profit provision but has an assurance of dividends.
Factors influencing the choices of purchasing stocks
Stocks can either be purchased through brokerage or Dividend Reinvestment Plans (DRIPs) or Direct Investment plans (DIPs). A dividend reinvestment plan is defined as a mechanism that permits shareholders to reinvest the dividends paid on their shares in additional shares automatically, without the use of a broker (Degennaro, 2003). The most popular means of purchase is the brokerage method that involves using brokers, equivalent to middlemen in business to manage the stock exchange activities. Various factors influence the decision making process of the investors on whether to use brokerage or DIPS/DRIPs in stock market. Top on their list are issues such as the costs involved, minimum balances and other key features such as financial advice, market analysis provision and monitoring stock exchange trade. For instance, investors prefer the brokerage method to DIPs/DRIPs. These brokerage can either be on full or
discount services. For the full services brokers offer market scrutiny and expert advice to clients hence a high commission is charged for the services provided. On the contrary, discount brokerages exempt investment advice and market breakdown thus charge lower commissions.
Another group of investors prefers the DRIPs/DIPs method of purchasing stock because it provides a means for you to add to your investment over an extended period of time. DRIPs enable investors add value to their businesses as the middleman/broker is eliminated and shares bought directly from companies hence cutting down the transaction costs involved. Investors simply need to make initial registration or enrolment fees regarded as a onetime payment. This method is most favourable to small investors.
Compare and contrast online brokerage to DIPs and DRIPs
The advancement in the use of Information, Communication and Technology has transformed the way in which business is conducted in the financial services industry. Online trading or ecommerce has attracted both consumers and suppliers on an equal measure. Investors have various reasons that attract them to use either the brokerage or the DRIPs method of stock purchase. These online brokerages have offered simple solutions that are equally cheap to conduct online trading and hold accounts. They consider factors such as trade commissions, customer service, trading tools, account minimums, investment options and market research during their decision making process. Fees and commissions charged have the highest probability of escalating from time to time depending on services offered thus the critical need to compare a company’s margin rates and requirements. Other investors consider the ease of using the online services available as they may not be experts at online trading.
Bristol-Myers Squibb, one of the most famous online trading sites on DRIPs charges 4 percent fee of the dollar amount of dividends being reinvested. This is equal to about a maximum of $5 per transaction. The firm also charges 4 percent of the amount invested via optional cash payments (maximum of $25). The minimum shares an investor can acquire from the company are 50. NASDAQ is another stock trading company that is well known for its dividends market. At Nasdaq, mutual fund dividends are paid out of income, usually on a quarterly basis from the fund's investments (http://www.nasdaq.com). Degennaro argues that like other middlemen in businesses, brokers can only make themselves relevant in the market by adding value that eventually generates profits (Degennaro, 2003). The table below shows a clear cut comparison between the stock purchase methods.