How To Buy And Sell Shares

Buying and selling shares of stock is a fairly easy proposition, though it still bears trading risks. All you need is some money and a few minutes to set up an account. The easiest way is to apply online to any number of brokerage firms through which you do the buying and selling. The broker will require a few bits of personal information, such as your name and address, your Social Security number, and driver's license information.

Brokers generally come in two varieties—discount or full-service—and offer as little or as much help as you need and are willing to pay for. Discount brokers, as the name implies, charge just a few dollars to buy and sell stocks, and many charge no other fees. They don't offer any advice, but many of them have very robust websites filled with information and tools to help you make investment decisions.

Discount brokers are generally best for do-it-yourself investors. Full-service brokers not only execute buy and sell orders for their clients but also recommend investments, offer financial planning and retirement services, and the like. They charge for these services, of course, and it's usually based on how much money you have on deposit and the level of service you want.

1. Set Up An Account

For purposes of this article, let's assume you're a DIY investor with an online discount brokerage account. Once you've set up your account and deposited the amount of money you want to invest and decided what stocks to buy, the process is fairly simple.

Depending on your broker's website, go to the "Trade" section of the website. This is where you'll see a menu of all of the various types of investments you can buy and sell, from stocks and bonds to mutual funds and ETFs. Then it's just a matter of putting in the name of the security or its symbol, the amount you want to buy or sell (either in number of shares or the dollar/pound amount), and what type of order you want to place. You can also place orders by phone. Your positions are held in your account.

2. Learn The Types Of Orders

There are a few types of orders you can place. These are the most common:

Market order

In a market order, you agree to buy or sell the stock at the current prevailing market price. Depending on the security you're buying and the brokerage firm you're using, the trade is usually made in real time and takes place almost instantly. There's no guarantee on what price you pay or sell it for, but it should be within a few cents of the current market price if it's a well-traded security.

Limit order

This is a request to buy or sell a stock at a specific price or better. For example, if Apple (AAPL) is currently trading at US$200 but you believe you can get it for US$195, your limit order won't be executed until and unless the price of the stock falls to that level. If you're looking to sell APPL shares, you can instruct your broker not to sell your shares until the price hits US$205/share.

However, even if the stock reaches the limit price, there is no guarantee that your order will be executed if there are other orders ahead of yours. That's because limit orders are usually executed on a first-come, first-served basis.

Stop Order

A stop (or stop-loss) order is an order to buy or sell a stock at the market price once the stock has traded at or through a stipulated price. It is typically used to protect an unrealised gain or against a specific loss.

For example, let's say you bought APPL at US$150/share and it now trades at US$200. If you're worried that the price may fall but you want to lock in your profit, a stop order tells your broker to sell the stock if it falls to US$195, thus preserving most of your gain. Likewise, if you bought a stock at US$20/share and would only be willing to suffer a US$5/share loss, you can set a stop order to instruct your broker to sell the stock if it hits US$15.

Stop-loss orders come in handy if you're not able to watch stock movements throughout the day. As with a limit order, the price actually executed is not guaranteed.

3. Set Your Bid And Ask Prices

Some securities, such as many bonds, mutual funds and ETFs, are quoted in terms of "bid" and "ask" (or "offer") prices. Simply put, the bid price is the most a buyer is willing to pay for the security, while the ask or offer price is the least amount a seller is willing to accept. In other words, if you're a buyer, you'll pay the ask price, while a seller will get the bid price. The difference between the two is the "spread," which is a source of profit for the broker.

For popular and widely traded ETFs and mutual funds, the spread is usually minimal, just a penny or two. However, the spread can be very wide—up to several dollars or pounds—with some thinly traded bonds or mutual funds.

4. Also Consider Dividend Reinvestment Plans (DRIPs)

There are also ways to buy stocks directly from the companies that issue the shares. These are called dividend reinvestment plans (DRIPs).

DRIPs can be a good way for buy-and-hold investors looking to invest for the long-term at a low or no cost. As the name implies, you can have your dividends reinvested automatically in more shares, which helps you buy more shares at little or no cost, or you can have the dividend payments sent to you. You can also set up a regular investment plan in which you send money to the company to buy more shares for you.

While DRIPs are a good way to accumulate more shares, they're not right for many investors. Here are two reasons why:

  1. Not all companies offer these programs, but many large "blue chip" companies do.
  2. Unlike a brokerage account, where you can buy and sell stocks at the market price in real time, there is often a significant time lag before your DRIP order is executed. That could take several days or longer, depending on how often the company buys shares and how quickly you can get the money to them. Likewise, it may take a while before the company sells your shares.

DRIPs aren't designed for speculators or investors looking to make a quick profit.

Summary

Buying and selling shares of a stock is fairly simple. You need to first establish an account with a broker through which you will trade and fund the account. Discount brokers are appropriate for DIY investors and charge very minimal fees, while full-service brokers provide various services like recommending investments that they charge for.

There are various types of orders investors can place with their broker, and investors can also buy stocks directly from companies through dividend reinvestment plans (DRIPs).