How Does Buying & Selling Stock Shares Work?

How Does Buying & Selling Stock Shares Work?
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You can own part of a successful company as long as it’s publicly traded, which means it offers shares of itself on a stock exchange. A stock exchange is a place where stock traders buy and sell shares of companies. You can take part in this action by working with professionals who are in the business of helping you buy or sell shares.

Finding the Symbol

All stocks have a symbol that the stock exchange assigns to them. This symbol is shorter than the company name and makes it easier to list the stock of the company in a small space on stock charts and trading boards. You can find a symbol by entering, for example, “symbol for Widget Makers, Inc.” as a search engine term online.

Getting a Broker

Only brokers can buy and sell shares of stock. You can find a broker by searching online or calling stockbrokers who are listed in your phone directory or online. You might want to consider a discount online broker. These services set up an account for you and allow you to buy and sell stocks with the click of a button. Once you set up your account, you send money to that account by mail or wire transfer, and you are ready to buy and sell.

Online discount brokers typically charge between $5 and $20 per trade, no matter how large or small the amount of money involved. Full-service brokers charge 1 percent to 2 percent of the value of the trade. For example, a $1,000 trade could cost you up to $20 at a full-service broker, whereas a $10,000 trade could cost $200. Full-service brokers offer advice that online brokers do not.

Trading Fees

When you decide to buy or sell, the broker charges you a trading fee. Full-service brokers and online discount brokers charge you for each trade you make. This means you pay a fee when you buy a stock and another fee when you sell it. The money for fees is taken out of your investment account with the broker. With online brokers charging $5 to $20 per trade and full-service brokers charging 1 to 2 percent of the value of the trade, you can greatly reduce your profits if you trade frequently.

The Trade

When you decide to buy a stock by either telling your full-service broker or clicking the “buy” button on your online trading screen, the broker sends a message to a trader on the floor of one of the stock exchanges that handles your particular stock. The trader then purchases the stock for the broker, who puts the record of the stock purchase in your account. This makes you the owner of the stock.

The Seller

The entity that sold you the stock is either an individual investor like you or a company such as a mutual fund. When that entity’s trader on the floor of the stock exchange accepts your trader’s offer, the trade is complete. The seller’s broker will remove the stock from the seller’s account. Your broker has three days to transfer the money to the seller’s investment account or the trade is cancelled. This process is automated, so cancellations of this nature seldom occur.

Holding Shares

You can ask for paper share certificates. These are actual pieces of paper that indicate that you own shares in the company whose stock you purchased. Alternately, you can choose to hold shares electronically. This is by far the most common way to hold shares. Basically, you do nothing after you make the purchase. The broker enters the record of your purchase in your investment account and you have an electronic share.