Can I buy stocks without using a broker?

Oran A. Hall, Contributor

QUESTION: How do I buy stocks if I don't want to go through a stockbroker? Can I buy stocks online? What is the minimum that can be invested? I am in high school. Is it recommended that I try the stock market?

- M. Wilson

PFA: A primary function of stockbrokers is to act as middlemen between the buyers and sellers of investment instruments. They have expertise that investors do not generally have, and they make the trading of securities very convenient for both buyers and sellers.

If you want to buy stocks without going through a broker, you would have to find a seller who has the stock you want, determine that the prospective seller is the real owner, determine a reasonable price for the stock, make arrangements to pay, and play a part in the transferring of the stock to your name. What a hassle. You would not want that.

The stock exchange serves a very useful purpose in the trading and transfer of stock. Its broker members also play a critical role and both charge fees, but that is a small price for relieving you of the inconvenience.

Apart from stocks that trade on the stock exchange, there are others that trade on the Over-the-Counter Market (OTC). These are not listed on the stock exchange, and I doubt that any meaningful level of trading takes place on it locally.

But even on the OTC market, there is a need for the stockbroker. If you want to trade in stocks, get used to dealing with the stockbroker.

You can buy stocks online, but you would need a local broker who has an established relationship with a broker in the country where the stocks trade. To open the online account, you would be required to complete all relevant forms and submit them to the local broker who would then send them to the broker in the other country.

You would then deposit funds into your account; the amount depends on the type of account. A web-trader account, which facilitates trade through a website, allows a very limited amount of trades in a given period. Trades must be settled within a three-day period. This account requires a minimum of US$500, which is remitted to the broker abroad through the Jamaican broker.

Platform trading

Platform trading allows more flexibility. The Jamaican broker provides a trading platform to the client. This type of account requires a minimum of US$25,000. It offers more per period in terms of trade and settlement. Clients who do not have the required funds in either type of account to settle their transaction, risk having their accounts cancelled and being banned from doing future business by the broker abroad.

There is no physical limit on where traders execute their orders from, and the local broker remains in the picture as long as money passes. When you sell stock, for instance, the funds are remitted to you through the Jamaican broker.

For transactions on the Jamaican market, there is no facility for online trading. Orders must be executed through a stockbroker.

In this liberalised market, every broker basically minds his own business. The minimum order accepted varies. One broker, for instance, requires a minimum of J$25,000; another requires a minimum of 100 units of stock but charges a minimum commission of J$500.

There are fees payable: to the stockbroker, commission of about two per cent of the value of the transaction; and to the stock exchange, a trade fee that varies from J$75 to J$500, depending on the size of the transaction, and a cess, which is 0.19625 per cent of the value of the transaction. General Consumption Tax applies to all fees.

If you are under 18, you cannot legally enter into a contract and therefore cannot trade in securities. I cannot say the stock market is something that you "try". It is serious business, but being a student does not of itself disqualify you from investing in stocks.

You have to decide if you have financial resources that you can afford to lose in a worst-case situation, whether you understand what investing in the market is about, and have the risk tolerance and time for this type of activity.

If you want to buy stocks, you need a stockbroker, at a cost.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of The Handbook of Personal Financial Planning, offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com.