Stocks Nuts And Bolts
How does a trade work?
A stock trade is really the process of two people getting together and trading a share of a company - or multiple shares of a company - where there's a buyer and there's a seller. Trade almost always happens on some type of stock exchange, whether it's the New York Stock Exchange or the NASDAQ. There's usually a market maker, somebody in the middle, who helps execute that trade.
What are the "bid" and the "ask"?
When it comes to selling a security, there's really two prices that are listed. There's the bid price and there's the ask price. The bid is the price that you can sell your stock for, and the ask is the price you can go buy. The difference between the bid and the ask is called the bid-ask spread. If the bid price was $10 and the ask price was $11, that difference, that $1, is called the spread.
What happens when I give my broker a buy or sell order?
In the very traditional sense of trading and security, you're going to call up your broker and you're going to say sell 100 shares of XYZ at market. That means the broker is just going to go and put those shares out for sale. So, they'll write a trade order and that trade order gets sent down to the floor of the New York Stock Exchange (for example). There's the market maker down there, who says, "Oh, here's 100 shares of XYZ someone wants to sell. Do I have any buyers out there? Oh, I do. I'll buy it in at $10 and I'll turn around and sell it for $10.50." Then, it goes out the other side to a buyer of the security. The reality of it is that most trades happen within the brokerage firm themselves. They never, necessarily, hit the floor of the market. Merrill Lynch is huge; there are gigantic brokerage firms. So, one broker in New York might be suggesting we sell XYZ and the broker in LA is saying let's buy XYZ., and they could be trading within their own book, within their own company's book and matching things up, at which point they'll charge commissions to clients on both sides and become their own market maker.
What is a "market maker", and how does that impact me?
The market maker in the traditional sense, and we're really just talking about the New York Stock Exchange here, is it's the middleman. It's the person that actually buys stocks and sells stocks, and they'll have an inventory. And a market maker makes a market in only one security, so this market maker is going to be the market maker of XYZ, and they really know this company. They know how many buyers and sellers might be out there. And they're really trying to create a market, keep a market available so that these securities can trade fluently. Really large companies that trade a lot, that don't have a lot of risk, are going to be very easy for a market maker to trade, they'll have a very low spread. Very small companies that don't trade very much but have a much larger spread, and really that's because it's riskier for the market maker to take the securities in and then turn around and try to sell them to somebody else.
When is money withdrawn from my account when I make a buy?
Whenever you purchase a security, or tell your broker that you want to purchase a security, most settle in about three business days, whether it's stocks or bonds. The cash isn't actually taken from your account until that security settles. You place a trade on Monday, but you probably don't receive the stock, or have the money taken from your bank account, until maybe Wednesday.
What is a "stock certificate"?
A stock certificate is just a piece of paper that shows the ownership of a stock. They're really relics of older times. It's hard to actually get stock certificates these days. They are just the paper showing that you own a share of stock. When you get stock certificates is usually when you're buying stock through a broker. The broker “holds” the securities for you. In reality, they're not even holding the securities. There's just a record with the company itself that XYZ Brokerage Firm owns so many shares of our stock and that is a stock certificate.
What if I lose my stock certificate?
If you know that you had a stock certificate and you've lost it, the best thing to do would be to contact the company directly. They usually keep a record of who owns their stock certificates. As long as they have a record that you own your stock certificate, they can issue you new certificates.
