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Buying Stocks - StockBrokers
There are various methods of
buying and financing stocks. The most common means is through a stock
broker. Whether they are a full service or discount broker, they
arrange the transfer of stock from a seller to a buyer. Most trades
are actually done through brokers listed with a stock exchange, such
as the New York Stock Exchange.
There are many different stock brokers from which to choose,
such as full service brokers or discount brokers. The full service
brokers usually charge more per trade, but give investment advice
or more personal service; the discount brokers offer little or no
investment advice but charge less for trades. |
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Another type of stock broker would be a
bank or credit union that may have a deal set up with either a full
service or discount stock broker.
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There are other ways of buying stock
besides through a broker. One way is directly from the company
itself. If at least one share is owned, most companies will allow the
purchase of shares directly from the company through their investor
relations departments. However, the initial share of stock in the
company will have to be obtained through a regular stock broker.
Another way to buy stock in companies is through Direct Public
Offerings which are usually sold by the company itself. A direct
public offering is an initial public offering in which the stock is
purchased directly from the company, usually without the aid of
brokers.
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When it comes to financing a purchase of stocks there are two ways:
purchasing stock with money that is currently in the buyers ownership,
or by buying stock on margin. Buying stock on margin means buying
stock with money borrowed against the stocks in the same account.
These stocks, or collateral, guarantee that the buyer can repay the
loan; otherwise, the stockbroker has the right to sell the stock
(collateral) to repay the borrowed money. He can sell if the share
price drops below the margin requirement, at least 50% of the value of
the stocks in the account. Buying on margin works the same way as
borrowing money to buy a car or a house, using the car or house as
collateral. Moreover, borrowing is not free; the broker usually
charges 8-10% interest.
Selling Stocks
Selling stock is procedurally
similar to buying stock. Generally, the investor wants to buy low and
sell high, if not in that order (short selling); although a number of
reasons may induce an investor to sell at a loss.
As with buying a stock, there is a transaction fee for the broker's
efforts in arranging the transfer of stock from a seller to a buyer.
This fee can be high or low depending on which type of brokerage,
discount or full service, handles the transaction.
After the transaction has been made, the seller is then entitled to
all of the money. An important part of selling is keeping track of the
earnings. Importantly, on selling the stock, in jurisdictions that
have them, capital gains taxes will have to be paid on the additional
proceeds, if any, that are in excess of the cost basis. |
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Sources: Wikipedia, FCIC, SEC and other public sources.
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