Buying or Selling Stocks

Introduction to Stocks

Buying stocks is not hard, but the process has its own rules, its own language and a special cast of characters.

brokerage house or firm - A brokerage is a firm that acts as an intermediary between a purchaser and a seller. To broker a deal is to communicate with both the buyer and seller as to acceptable price on anything sold or purchased. Your deal is handled by a stock broker who has passed an exam on securities law and has registered with the Securities and Exchange Commission (SEC).

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.

Brokers - handle buy and sell orders placed by institutional and individual customers in return for a commission.

Dealers - buy and sell securities for their own accounts or their firm's account rather than for a client. Dealers make their money on the difference between what they pay to buy a security and the price they get for selling it. Dealers may also be called broker-delears, since they can do both jobs.

Traders - 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.

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.

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 cheapest way to trade securities, however, is with an online brokerage firm. 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.