When you want to buy a pair of shoes you simply walk into a store or visit Amazon.com and buy one. And should you decide to sell those shoes after wearing them for a while, you can simply advertise it, sell it, and collect your money. But the process is a little different for buying and selling stocks.
Many years ago, when markets were a lot less regulated, and buyers and sellers roamed freely, it was relatively easy for people buying and selling stocks. That came to a natural end when less than sophisticated people started to get taken advantage of by the more sophisticated and markets evolved into the tightly regulated, well-oiled machines we have today.
Buying and Selling Stocks – The Markets
In today’s world you access the marketplace for buying and selling stocks through a broker. But before we get into the fundamentals of how brokers work, it’s probably a good idea to explain how markets work.
Companies issue shares in their stock via what is called a stock exchange. In the US the stock exchange is broken up into two basic marketplaces. One is the New York Stock Exchange (NYSE) and the other the NASDAQ. The former has listed on it, shares in companies that are as old as time. These companies are the really big ones that have endured over the years and include the likes of AT&T Inc. (NYSE: T), Bank of America Corporation (NYSE: BAC) and a host of others. Including the newly minted high-growth companies, the NYSE contains a listing of over 2,800 companies. The NASDAQ contains mostly technology companies, and there you’ll find your Google’s, Apples, and Microsoft. The companies listed on these large exchanges are deemed more stable and secure than other lower tier exchanges and the biggest and best companies on these exchanges have earned the moniker, ‘Blue Chip.’
Buying and Selling Stocks – The Over the Counter Markets
2,800 companies don’t begin to detail the number of companies in the US, of course. Those companies that aren’t as big and as stable or profitable or the blue chip exchanges are trader on what is called the Over the Counter Market (OTC). Regulation here is less stringent and companies don’t have to file the mountains of reports to the overall regulator for all US markets, the Securities and Exchange Commission (SEC). The SEC is the watchdog that makes sure both buyers and sellers play by the rules.
So now that you have an explanation of the markets and the regulatory framework that governs it, it’s time to get into access – specifically, how you, a trader or investor, can get plug into the system of buying and selling stocks.
As mentioned at the beginning, ordinary people can’t just walk up to a store and order shares in Google. To do that you need to go through a broker. Think of the broker as a stock market middle man, that person who through the force of policy and law, have wedged themselves between the buyer and seller. We may not like the fact that they are there, but there’s no way to get into buying and selling stocks without them.
Buying and Selling Stocks – The Broker Types
Brokers come in two flavors: online brokerages and face-to-face brokers. The latter is now only used by big institutions so we won’t dwell too much on them here. The broker that ordinary people buying and selling stocks are likely to come across is the online broker. The more prominent online brokers include Charles Schwab, Fidelity, TD Ameritrade, Scottrade, and E-trade. They form the mainstream core of brokers that help connect ordinary buyers and sellers of stocks with one another. Like all middle men, brokers charge a fee for the service they provide.
These fees vary from broker to broker but expect to pay anywhere from $4.95 – $19.95 per trade. Most of these brokers also provide what they call leveraged accounts. With these accounts you are allowed a certain amount of funds to enter into the marketplace. Also called margin accounts, these accounts allow you to buy and sell stocks without the 3 day settlement perioud. They also give you access to more funds. For example, if you have an account with $25,000 in it your broker may allow you to trade with up to $100,000 in funds. While this sounds compelling you also need to be very careful how you use these funds as if a stock turns against you your entire account could we wiped out.
Buying and Selling Stocks – How Leveraged Accounts Work
So as an example, let’s say you used $10,000 to buy shares in Google which you eventually sell for $20,000. At the end of the settlement period you are required to pay the broker the $10,000 plus all fees associated with the trade. It’s really as simple as that. The buying and selling of stocks is mechanical but so much of it is dependent on skill and expertise. There’s also an element of risk which has to be balanced again the raft of human emotions that affect action.
Before you can effectively get into buying and selling stocks, you need to build up a fund of knowledge. Luckily you can get all this knowledge by signing up to a newsletter that caters to this sort of thing. The best ones are 100% free to join and you should be able to unsubscribe when you feel like it. You can test the waters with this one – 100% FREE to join. Sign up now.