How to Get Common Stock for Your Investment Portfolio

Common stock represents a fundamental component of financial markets, offering individuals a direct way to participate in company ownership. This investment provides a pathway for individuals to potentially benefit from a company’s growth and profitability over time.

Understanding Common Stock Fundamentals

Each share of common stock grants the holder a proportional equity interest in a business. This ownership typically comes with voting rights, allowing shareholders to influence corporate governance matters like the election of the board of directors and major policy decisions.

Shareholders of common stock can receive dividends, which are distributions of a company’s profits. Dividend payments are not guaranteed and depend on company profitability and board decisions. Stock value can also increase through capital appreciation if the company performs well and its price rises. In liquidation, common stockholders have the lowest priority for assets, paid only after creditors, bondholders, and preferred stockholders.

Primary Acquisition Channels

Individuals commonly acquire common stock through a brokerage account, an intermediary between the investor and financial markets, enabling access to publicly traded stocks and other investment products. Brokerage accounts are the most straightforward method for most individual investors to buy and sell shares.

New companies initially offer shares to the public through an Initial Public Offering (IPO). While retail investors may have limited access, they can sometimes participate through specific brokerage platforms that allocate a portion of these offerings. After an IPO, the stock becomes available for purchase on the secondary market through standard brokerage channels.

Employees can acquire company stock through employer-sponsored plans like Employee Stock Purchase Plans (ESPPs), which allow employees to buy stock, often at a discounted price, via payroll deductions. Restricted Stock Units (RSUs) are another form of compensation where employees receive shares of company stock, typically vesting over time. These plans provide a structured way for individuals to build ownership in their company.

Step-by-Step Brokerage Purchase

Acquiring common stock through a brokerage account involves several steps, beginning with choosing a suitable brokerage firm. Factors to consider include whether it is an online or traditional brokerage, the fee structure, available trading platforms, and the range of investment products offered. Many online brokers now offer commission-free trading for US-listed stocks, which can significantly reduce costs.

After selecting a brokerage, opening an account is the next step, typically requiring personal details such as your legal name, current address, Social Security number or other tax identification number, and government-issued identification. Brokerages also request employment status, annual income, and estimated net worth to assess suitability and comply with “Know Your Customer” (KYC) and anti-money laundering (AML) regulations. The application process can often be completed online within minutes, though verification might take a few business days.

Once established, the account must be funded before stock purchases can be made. Common funding methods include Automated Clearing House (ACH) transfers from a linked bank account, which usually take one to three business days to clear. Wire transfers offer faster processing, often on the same day, but may incur a fee ranging from $10 to $30. Some brokerages also accept checks, though these typically have the longest processing time, around five to seven business days.

Client funds and securities held in brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). SIPC protection covers up to $500,000 in securities, including a $250,000 limit for cash, in the event the brokerage firm fails financially. This coverage safeguards against the loss of assets due to brokerage insolvency, not against market fluctuations or investment losses. Individual retirement accounts (IRAs) and taxable brokerage accounts are considered separate capacities for SIPC protection purposes.

With funds available, placing a trade is the next action, involving searching for the desired stock by its ticker symbol on the brokerage’s trading platform. Investors then decide on the number of shares to buy and the type of order to place. A market order instructs the broker to execute the trade immediately at the best available current price, suitable when immediate execution is prioritized. A limit order, conversely, specifies a maximum price an investor is willing to pay when buying or a minimum price when selling, ensuring price control but not guaranteeing execution.

After the order is placed and executed, the brokerage provides a trade confirmation, and the transaction undergoes a settlement process. For most stock trades, settlement occurs on a “T+2” basis, meaning ownership of shares and transfer of funds are completed two business days after the trade date. This period allows for administrative processing to finalize the transaction.

Other Acquisition Methods and Considerations

Direct Stock Purchase Plans (DSPPs) provide an alternative way to acquire common stock by allowing individuals to buy shares directly from a company, bypassing traditional brokerage firms and potentially saving on commission fees. To enroll in a DSPP, an investor applies directly to the company or its designated transfer agent.

DSPPs often require a minimum initial investment, which can range from $50 to $1,000, and may have minimums for subsequent purchases, sometimes as low as $50. Shares are often purchased at an average price over a period, rather than a specific market price, and can include fractional shares. While some DSPPs are commission-free, others may charge small fees for enrollment, purchases, or transfers.

Dividend Reinvestment Plans (DRIPs) enable shareholders to automatically use cash dividends to purchase additional shares or fractional shares of the same company’s stock. This mechanism allows for compounding returns, as dividends continually buy more shares that then generate their own dividends. DRIPs can be offered directly by the company or through a brokerage firm.

DRIPs allow for the acquisition of fractional shares, ensuring that all dividend funds are reinvested. Many DRIPs facilitate these reinvestments without additional commissions, though dividends reinvested are still considered taxable income. This method helps investors increase their stock holdings systematically over time without requiring active management of dividend payouts.

Stock can also be acquired through gifts or inheritance. When stock is received as a gift, the recipient assumes the donor’s original cost basis for tax purposes. The transfer process involves working with the company’s transfer agent or a brokerage firm to re-register ownership.

In the case of inherited stock, beneficiaries receive a “stepped-up” cost basis to the fair market value of the shares at the time of the deceased owner’s death. This adjustment can significantly reduce potential capital gains taxes if the stock is later sold. The executor of the estate handles the transfer of ownership to the beneficiaries, often through a transfer agent or the brokerage where the shares were held.