The $tock Market for Beginners
How it works
Lets say you hear a tip that Ford is coming out with a brand new car that is supposed to double their business. You think to yourself, "Darn, I wish I owned that company." Well you can. Ford, along with thousands of other companies, lets the public buy part of its company. It does this through selling shares. A share is simply a piece of paper that says you own part of a company. This part is usually extremely small, perhaps thousandths of a percent of the total company, but, hey, it is a beginning. You decide you want to buy part of Ford. You run home, and count up all of the money you have been saving, and find out you have 250 dollars. Well you are not going to be able to buy the whole company, but it is a start.
You've got the money, you know what stock you want to buy, now what? Do you go to the grocery store and ask for a dozen shares of McDonalds. Not exactly, but close. You don't go to a grocery store, but rather you contct a broker. A broker is someone who acts as a go-between, you and the actual stock market, making your transactions for you. A while back, you probably would have called a broker on the phone, and asked him to by you stock, but that could take a long time. Now most people invest over the Internet, through big "broker companies", such as eSchwab.
The broker's reply would come something like this, "Let's see, a share of Ford costs 20 dollars (Not the actual price), and I am going to charge you 50 dollars for my services, so you can buy 10 shares of Ford. " You then send the broker your money, and you get the stock. (They usually don't give you the paper stock certificates, but they transfer ownership over to you electronically.) Voila, you have just bought stock in a company!
Sounds simple enough, right? Actually it is not if you look at it from the broker's point of view. When you told the broker you wanted those 10 shares of stocks, he did not magically buy them for you, or already own them. Rather, he sent a message to another person who is working down on the floor of the New York Stock Exchange (or any other stock exchange). He tells this person to buy these stocks for you. This person is called a "Floor Broker."
Now this person goes to the part of the Stock Exchange that is allotted to this particular stock. Here there are companies that specialize in this stock. This means that they will usually, if not always, buy and sell from people at the normal price. The floor broker then buys your ten shares from one of these people, reports his trade through the hundreds of computers on thefloor, then reports to your broker that he bought the stock. The broker keeps a record that you own that stock, rather than sending you the actual paper stock certificates. If you ever want to sell them, your broker will sell them, deduct his commission, and then give you the money.
Got all that? Good. Now you are ready to move on to the next section of our tutorial.
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