How The Process Of Buying And Owning Stocks Works

The stock market can seem like a confusing place, we have all seen different scenes of the exchange floor with people yelling, buying and selling. And there is some way people are making money during all this chaos. How do they do it? Let's take a look at how the stock market works.

The purpose of the stock market is to move money. Some people need to use it and others have it to be used. A company's decision to sell stock is usually based on their need for a large sum of quick cash. Usually it is for some type of expansion or building a new plant. Then the company will issue stock certificates. The common amount for a certificate is $1.00 to begin. The certificates are a piece of the company. When buying stock you are becoming a part owner. Often the people with the most stock will sit on a company's board of directors and help to make the decisions about the company's future. Everyone who owns a share of the stock has a vote in how the company is run. It doesn't matter if they have one share or 1000.

When you decide you want to buy a piece of a company. The first thing you want to do is to research the company. Find out what they are about and find out their history of profitability. You want to make sure a company is moving in the right direction before you invest your hard earned money.

Then you need to find a reputable broker. A broker is in charge of your money while they have it, make sure it is someone you can trust or they might take your money and run. The stock broker is a go between. They match their clients with the available stock at a price they are willing to pay. You can determine the amount you are willing to pay per share. You might have to wait until it reaches that number but when it does your broker will buy for you. The same goes with selling, you can pick a predetermined number to sell and when it reaches that number it will be sold.

Usually when someone takes this approach they have a percent of profit they are interested in earning and are willing to wait until it happens.

You can also trade in stock online and be your own broker. There are many web sites that will allow you to do this and they will charge you a small fee for every transaction you make. There are some people who make their money by spending the day in front of their computers buying and selling. The amateur stock broker is called a day trader. They are usually only interested in the short term. Hoping to buy and sell at a profit within one or two business day.

How to Choose a Stockbroker

A stockbroker is a person who mediates buying and selling of stocks and shares. She is specifically trained to do this for investors in exchange for a fixed commission. This commission, a percentage of the invested capital charged for the service, varies from broker to broker, or the firms they represent.

Transactions by stock brokers in the US and UK

In the US: When acting as an agent, the stockbroker typically charges the client a flat fee and/or a percentage-based commission for undertaking the trade, and the price quoted the client must be the best price available in the market. When acting as a principal, the trade could be with another market participant or one of the stockbroker's clients. When trading in a principal capacity with a client, the broker informs the client and charges the client a markup or markdown from the prevailing market price.

In the UK: When acting as an agent, the stockbroker charges the client a flat fee and/or a percentage-based commission for undertaking the trade, and the price quoted the client must be the best price available in the market. When acting as a principal, the trade could be with another market participant or one of the stockbroker's clients. When trading in a principal capacity with a client, the broker is obliged to inform the client and no commission is charged.

Basics of Stock trading

Trading Basics
Basic Steps in How Stock Trading Works
Trading stocks. You hear that phrase all the time, although it really is wrong – you don’t trade stocks like baseball cards (I’ll trade you 100 IBMs for 100 Intels).
Trade = Buy or Sell
To “trade” means to buy and sell in the jargon of the financial markets. How a system that can accommodate one billion shares trading in a single day works is a mystery to most people. No doubt, our financial markets are marvels of technological efficiency.
Yet, they still must handle your order for 100 shares of Acme Kumquats with the same care and documentation as my order of 100,000 shares of MegaCorp.
You don’t need to know all of the technical details of how you buy and sell stocks, however it is important to have a basic understanding of how the markets work.
If you want to dig deeper, there are links to articles explaining the technical side of the markets.
Two Basic Methods
There are two basic ways exchanges execute a trade:
• On the exchange floor
• Electronically
There is a strong push to move more trading to the networks and off the trading floors, however this push is meeting with some resistance. Most markets, most notably the NASDAQ, trade stocks electronically. The futures’ markets trade in person on the floor of several exchanges, but that’s a different topic.
Exchange floor
Trading on the floor of the New York Stock Exchange (the NYSE) is the image most people have thanks to television and the movies of how the market works. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It could not look any more chaotic.
Yet, at the end of the day, the markets workout all the trades and get ready for the next day. Here is a step-by-step walk through the execution of a simple trade on the NYSE.
1. You tell your broker to buy 100 shares of Acme Kumquats at market.
2. Your broker’s order department sends the order to their floor clerk on the exchange.
3. The floor clerk alerts one of the firm’s floor traders who finds another floor trader willing to sell 100 shares of Acme Kumquats. This is easier than is sounds, because the floor trader knows which floor traders make markets in particular stocks.
4. The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.
Of course, this example was a simple trade, complex trades and large blocks of stocks involve considerable more detail.
Electronically
In this fast moving world, some are wondering how long a human-based system like the NYSE can continue to provide the level of service necessary. The NYSE handles a small percentage of its volume electronically, while the rival NASDAQ is completely electronic.
The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. While this system lacks the romantic and exciting images of the NYSE floor, it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading.
For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of online investing by putting you one step closer to the market.
You still need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.
Conclusion
What does this all mean to you? If the system works, and it does most of the time, all of this will be hidden from you, however if something goes wrong it’s important to have an idea of what’s going on behind the scenes.