A broker, originally, was a wine seller who broached — broke open — wine casks. Today's broker has a less liquid but often heady job as a financial agent.
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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 use a traditional or online brokerage firm, an investment firm that is licensed to buy and sell securities by the Securities and Exchange Commission (SEC). These firms are also known as broker-dealers.
You may also be able to buy stock directly from the company that issues it through a direct stock plan (DSP) or a dividend reinvestment plan (DRIP). A number of large companies offer these plans and charge only a minimal fee to handle your transactions.
Though you probably use the term broker to describe all the professionals who buy and sell stocks, the financial markets use titles to describe more precisely the ways securities change hands.
Brokers handle buy and sell orders placed by individual and institutional clients. They may earn a commission on each transaction or receive an annual fee based on the value of the client's account.
Dealers buy and sell securities for their own or their firm's account, helping to keep the market liquid. Dealers make their money on the difference between what they pay to buy a security and the price they can get for selling it.
Traders, also called registered or competitive traders, buy and sell securities for their own portfolios. The term trader also describes those employees of broker-dealers who handle the firms' securities trading.
| Where the Commission Goes |
The commission you pay to buy and sell stock is divided — by prearranged contract — between your broker and the brokerage firm. The commissions and any additional fees are set by the firm, but your broker may be able to give you a break if you trade often and in large volume. Generally, the higher the standard fee, the more room there is for negotiation. |
Places orders to buy and sell
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When you tell your broker to buy or sell a stock at the current price, called the market price, you are giving a market order. The price you pay (or get) is usually the same or close to the quote you're given when you place the order, depending on how quickly it is handled and how actively traded the stock is.
If you think the price of the stock you want to trade is going to change, you can place a stop order or a limit order.
A stop order instructs your broker to buy or sell 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.
A limit order instructs your broker to buy or sell a stock only at a specific price or better, called the limit price. A limit order doesn't become a market order, so you won't pay more or sell for less than you want. But if a price changes quickly, your order may not go through even if the price was actually at the limit for a time.
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 has traditionally lasted until it was either filled or you cancelled it. But some firms now keep them on the books for only 90 days before they expire. A day order is canceled automatically if it isn't filled by the end of the trading day.
There are differences between buying through a broker-dealer and buying stock directly. With a DSP or DRIP, you can't give a limit or stop order, nor can you decide on the day or the market price at which to buy. |
Handles transaction
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Some firms, usually called full-service brokers, provide a range of services beyond executing buy and sell orders for clients, such as offering in-house and independent research and developing long- and short-term investment goals.
Discount brokers carry out transactions for clients, but typically offer less personalized services. Their fees, however, are usually much lower than those of 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 least expensive way to trade securities, however, is usually online. Many established full-service and discount brokerage firms offer substantial discounts to their customers who buy and sell online. And other firms, often even less expensive, operate exclusively online. |
Reflects activity
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Up-to-date information is the lifeblood of stock trading. It not only reflects current investment decisions but also influences what investors buy and sell in the hours and days that follow.
Trading activity in individual stocks and the market as a whole is reported constantly online, on the radio and television, and summarized daily in the financial sections of major newspapers. Overall movement in the stock market is tracked by a variety of indexes and averages, such as the Dow Jones Industrial Average (DJIA) and the Standard & Poor's composite stock index (S&P 500).
Access to online 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 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. |
Usually you buy or sell stock in multiples of 100 shares, called a round lot. But you can buy just a single share, or any number you can afford. That's called an odd lot. Brokers at one time charged you more to buy and sell odd lot orders. But now these orders are handled electronically, without additional charge.
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optionsXpress, Inc. offers no investment recommendations, tax or legal advice. Content is provided for educational and informational purposes only. Materials licensed by optionsXpress, Inc.optionsXpress, Inc. from Lightbulb Press, Inc. © 2008.
This information is provided with the understanding that the authors, publishers and optionsXpress are not engaged in rendering financial, accounting or legal advice. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.
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