- Personal Finance»
- Investing in Stocks, Bonds, Real Estate, More
Buying Shares – How Does It Work?
In any general conversation about investing, you will inevitably hear about buying shares and investing in the stock market. So what does it all really mean? It’s actually much more simple than people try to make it—especially the pundits on the financial channels. Basically, the word “shares” means a portion of ownership in a company. When you buy shares of stock, you’re basically becoming a stakeholder in a corporation—you have invested money, and you now have a certain amount of interest in the company’s dealings. Basically, you are putting up capital that the company is going to use to continue expanding their business or funding some corporate project they have going on, or just to help with paying for operational costs of the business. In return, the company (in a perfect world) is supposed to provide you with a return on your investment, in the form of a higher price-per-share of the company’s stock, or in the form of dividends being paid to you based on how many shares of the company’s stock that you own. If you think of a company as a gigantic jigsaw puzzle, buying shares of stock in that company is the same thing as buying a couple of pieces of the puzzle. The normal, general valuation of a company is actually the amount of shares outstanding multiplied by the price per share. This total gives you what’s known as the market capitalization (or “market cap” for short) of a company—in other words, it’s the company’s total value if it were to be sold today. When you’re buying shares, you are literally investing in the stock market, and in that company in particular.
Buying Shares of Stock
So, how do you go about actually buying the shares? Well, you’re going to need to go through a brokerage in order to do that. You see, shares of stocks are traded on what’s known as exchanges. Exchanges are basically huge open markets where people buy and sell shares of stock by the millions per day. One of the most popular stock exchanges in existence is the New York Stock Exchange (NYSE), located on Wall Street in New York City. Other very popular and high-volume exchanges are the NASDAQ (National Securities Dealers Automated Quotations) and the OTC-BB (Over the Counter Bulletin Board). In order to buy any shares of stock in any of these exchanges, you need to go through a licensed brokerage. A brokerage basically acts as an intermediary between you, the investor, and the trading exchanges. You basically open up an account with a brokerage, which is very similar to a regular bank account. They take your order, whatever it is (for example, you want to buy 100 shares of Ford’s stock) and they actually purchase the stock on your behalf (using your money of course). From that point, you own the shares, at whatever price per share you bought them for, and you can sell them anytime you want, even in the same day that you bought them. If Ford’s stock is trading at $13.00 per share, and you wanted to buy 100 shares of the stock, you would need at least $1,300.00 in your brokerage account to buy the shares. You will also pay some sort of commission to the brokerage for every transaction (purchase or sale of stock) that’s made through your account. Once you have purchased the shares, you are literally a part-owner (no matter how small your part is) of that company. There are many decisions that the company will make where they will actually ask for their shareholders to vote whether or not they want the decision to go through. This will be part of your options as an owner of stock, but in many cases you’re not required to vote. I could go on and on about buying shares of stock, but I’m going to close this hub out…I think I’ve given you enough to think on just as-is. Keep learning and keep investing!