What’s the Difference Between Direct and Indirect Shares?

Daniel Penzing
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Surprise — You May Have a Lot of Your Money in Just a Few Stocks

If you look at your latest statements, you will likely see that a majority of your money is held in just a few stocks, and you might be wondering what that means for your portfolio. Is it a lot? A little? Why should you care?

If you are like many investors who have a lump sum in retirement or some other type of account, the simple answer might be “not much.” You’ve made your decisions and invested your money. But if you are still building your retirement portfolio or are planning to in the immediate future, you will want to pay careful attention to the size of the position in your largest positions.

Direct or Indirect — How Do You Know?

Both shares are purchased shares in a company or investment.

Direct shares are the actual percentage of the company you own.

Indirect shares are shares that hold a fractional interest in company stock, such as mutual funds or exchange traded funds. These shares are written as a percentage, such as 0.05%.

You can find information about the composition of a fund’s portfolio on a prospectus, which is legally required to contain the fund’s investment objectives, key risks and other relevant information. For example, one popular SPDR’s Fund’s prospecti contain more than 100 pages of information.

Privileges of Direct Stock Ownership

Direct stock ownership allows you to take advantage of two corporate perks:

  • Proportional voting rights
  • Profit sharing

With proportional voting rights, you are eligible to vote for directors. You'll also receive a number of votes equal to your shares of common stock based on the size of the company or number of outstanding shares. For example, if your company has 1 million outstanding shares and you own 100 shares, you’ll have 10 votes.

You’ll also have the opportunity to benefit from profit sharing. This option entitles you to a certain percentage of the company’s yearly profits. However, there’s no guarantee that profit sharing will occur, and you can’t rely on your shares to pay out dividends.

Insider Trading — A Different Definition of Direct Ownership

Swanky. Prestigious. Cool. These are just a few of the words that can be used to describe direct ownership. When you buy direct shares, you own a portion of the company, and in theory, you have a say in how the company is run. In other words, you directly direct the operations of the company.

When you own shares of stock directly, you have the full rights of the owners of that company — and that means you have the ability to sell your shares for the purpose of evading your tax bill.

Summary

Direct shares or direct stock are shares of a company that is not issued by the company. These shares are issued by broker and represents a direct purchase.

Indirect or Indirect shares or stock are shares issued by a company. These shares represent a fraction of the shares a company has in total, and the rest are direct shares that are purchased, traded or owned by someone else. These indirect shares are fractionalized assets and can be transferred.