Buying stocks isn't hard, but the process has its own rules, its own language and a special cast of characters.
To buy or sell a stock, you usually have to go through a brokerage house, an investment firm that is a member of a stock exchange. Your trade is handled by a stockbroker who has passed an exam on securities law and has registered with the Securities and Exchange Commission (SEC), an independent agency that enforces securities law and regulates the investment industry.
You may also be able to buy stock directly from the company that issues it through a dividend reinvestment plan, or DRIP. A number of large companies offer these plans and charge only a minimal fee to handle your transactions. If you sign up, your dividends are automatically reinvested to buy additional shares, and you can make regular cash purchases as well.
Though individual investors typically use the term broker to describe the professionals who buy and sell stocks, the financial markets use other, less widely recognized titles to describe the ways securities change hands and the people who get the job done.
Brokers handle buy and sell orders placed by individual and institutional clients in return for a commission. Dealers buy and sell securities for their own or their firm's account rather than for a client.
For example, if you want to sell shares, a dealer might buy them for the firm. Dealers make their money on the difference between what they pay to buy a security and the price they can get for selling it.
Frequently dealers are also described as broker-dealers, since they may fill both roles. Investment bankers, or underwriters, buy new issues of stock directly from corporations and sell them to individual and institutional investors.
Traders, also called registered or competitive traders, buy and sell securities for their own portfolios. In this sense, the term is interchangeable with dealer. However, the term traders is also used to describe employees of broker-dealers who handle securities transactions for the company and its clients.
Usually you buy or sell stocks in multiples of 100 shares, called a round lot. Small investors can buy just a single share, or any number they can afford. That's called an odd lot. Brokers often charge more to buy and to sell odd lot orders.
Places orders to buy and sell When you tell your broker to buy or sell a stock at the best price currently available, called the market price, you are giving a market order.
The price at which the trade takes place is usually the same or close to the price quoted when you placed the order, depending on how long it takes to handle the order and how actively the stock is traded.
If you think the price of the stock you want to trade is going to change, you can place a limit order, which instructs your broker to buy or sell only when the stock is at the price you've named, or better.
A stop order instructs your broker to buy or sell at market price once the stock hits a specified target price, called the stop price. Stop orders are usually placed to limit losses or protect profits. Their downside is that they may be executed at a price higher or lower than the stop price (since the stock trades at the current market price after it hits the stop price).
2. Brokerage Firm
Handles transactions. Some brokers, usually called full-service brokers, provide a range of services beyond executing buy and sell orders for clients, such as researching investments and developing long- and short-term investment goals.
Discount brokers carry out transactions for clients, but typically offer more limited services. Their fees, however, are usually much lower than full-service brokers'. And for experienced investors who trade often and in large blocks of stock, there are deep discount brokers, whose commissions are even lower.
The cheapest way to trade securities, however, is with an online brokerage. Although you won't get personalized service, many Internet brokerages provide plenty of online resources to help you make informed investment decisions. And many established full-service and discount brokerage houses offer substantial discounts to their customers who buy and sell online.
3. Stock Exchange
Up-to-date information is the lifeblood of stock trading. Trading activity in individual stocks is reported daily in The Wall Street Journal and other major newspapers. Overall movement in the stock market is tracked by a variety of indexes and averages, such as the Dow Jones Industrial Average and the S&P 500.
In addition, the Internet is making it possible for even novice investors to tap into this up-to-the-minute market information that used to be available only to investment professionals.
Access to this information is dramatically changing the way individuals invest. With just a little practice, you can research the financial history of a particular company, take advantage of online software that will help you choose an appropriate stock, or access free real-time stock quotes. Investors can also use online information to analyze the impact of their buy and sell decisions on their portfolios and plan their future trades.
When you give a stop order or a limit order, your broker will ask if you want a Good 'til Canceled (GTC) or day order. A GTC stands until it is either filled or you cancel it. A day order is canceled automatically if it isn't filled by the end of the trading day.
Processing your request...
This may take a few moments...