The buying and selling of stocks is one of the great mysteries that you grow up with. The typical experience is that buying and selling stocks is this wild, crazy, super complex gamble that will either make you richer than a king or lose all of your possessions. In reality, the buying and selling of stock certificates is a very simple and easy process.
The way most people participate in the stock market is through a broker. With the internet has come the advent of online brokers with incredibly cheap commissions. Commissions use to hit around $200 per transaction, but now average around $20. The broker role used to be that he was a guide that helped you with your stock decisions. However, more people are doing their own due diligence and using the broker just for what it really is meant for … and that’s to buy or sell the stocks that you would like.
The way it works is like any other transaction with a little bit of haggling rules involved. The stock will have a current market value, say $50. To buy this stock you have to see what the asking price is. This is called ‘the ask’. This is the price that someone in the market is willing to sell you some stock. The ask could be at the current value, or it could be a penny higher or it could even be 10 cents higher or more. Again, the asking price is the current price that someone is willing to sell stock to you for.
To sell this stock you have to check what the bidding price is. This is called ‘the bid’, which is the price that someone in the market is willing to buy stock from you. It could also be at the current market value, a penny lower or even more than 10 cents lower.
Lastly, the size is the number of shares available at the bid and ask. You need to add two zeros to get the true size.
When you see a stock quote, it usually looks something like this:
|YHOO||$50.00||$49.95||$50.03||10 x 50|
In this example, YHOO’s current market value is $50. There are 1000 shares available that you can sell for $49.95 (a buyer is willing to pay $49.95 for 1000 shares of YHOO) and there are 5000 shares available to be bought at $50.03 (a seller is willing to part with 5000 shares of YHOO for a price of $50.03).
These are very important points. Just because a stocks current value is $50 does not mean that you can buy it for $50 or sell it for $50. However, if you buy a stock that has a lot of shares being traded (like Yahoo, Intel, Microsoft) you will not see a huge spread between the bid and the ask. If it’s a smaller stock that is not traded much (like Select Comfort, Marvell Comics, or a small television or lingerie retail store) there will probably be a large spread between the bid and the ask.
Now, when you’ve decided what you want to buy and you see the asking price that you want, you simple tell your broker how many shares you like and the broker buys the stock for you.
The great thing about the stock market is that it is very liquid. Unlike buying and selling cars where you might have a handful of buyers or like buying real estate, buying and selling of stocks is very easy to get in and out of. That’s why it attracts so many people to invest in the stock market.