How do I invest and buy/sell stocks? What does "use a broker" mean?

Question

This is an embarrassingly basic question. I'm a college student and know very, very little about the world of investing and purchasing stocks. I realize that some Googling could find me the answer to this question, but I feel like this is an important basic question for a Q&A site about money.

How do I buy and sell stocks? I've read things like "use a broker" but I honestly don't know what that means. Say I wanted to go invest in Facebook after the IPO. How do I do it? What are the literal steps I'd have to take to purchase stock in Facebook? Afterwards, how do I sell my shares?

Answer 1

I'm posting this because I think I can do a better job of explaining and detailing everything from start to stop. :)

A "broker" is just someone who connect buyers and sellers - a middleman of sorts who is easy to deal with. There are many kinds of brokers; the ones you'll most commonly hear about these days are "mortgage broker" (for arranging home loans) and "stockbroker". The stockbroker helps you buy and sell stock. The stockbroker has a connection to one or more stock exchanges (e.g. Nasdaq, NYSE) and will submit your orders to them in order to fulfill it. This way Nasdaq and NYSE don't have to be in the business of managing millions of customer accounts (and submitting tax information about those accounts to the government and what-not) - they just manage relationships with brokerages, which is much easier for them.

To invest in a stock, you will need to:

• identify the brokerage firms which are available to you
• select one of those.
  • Consider fees, account minimums, and what sort of trading tools you need
  • A brokerage like ETrade will offer you fancy options and futures and conditional orders and things like that, plus an iPad app, and an RSA dongle to secure your account... but you probably don't need all those. And their fees are higher than many other brokerages' fees.
  • If you already have a retirement account of some sort, you may be able to open an account at the same financial institution, which could be convenient for you even if their fees aren't the lowest. For instance, I like Vanguard, but that's mostly because they have nice mutual funds and cheap-ish stock trading; their stock trading interface actually stinks.
• open an account at that broker
  • provide personal information, including your social security or taxpayer identification number (so that they may check your credit and report your income to the government)
  • read the fine print. do not just skip reading the fine print.
• provide the broker with money (for instance, provide them with your bank account number and transfer money via electronic funds transfer... or mail a check)
• use the tools the broker provides you to place a trade - in your case, you'd probably want to buy several shares of Facebook at the market price, a "market order".
  • The broker will charge you a commission, usually $5-20. They will charge you this again if you sell that stock. If you're not investing more than ~$200 in a stock, it's almost certainly not worth it to incur these fees. Lots of $1000+ are more fee-efficient.
  • Also, be aware that you probably won't get to say "buy $1000 of this stock". You'll have to say "buy N shares of this stock at the current price" and hope that works out to around $1000. The current price will change several times a second. You may also make a limit order, saying "buy N shares of this stock, but only when it's at a price no higher than $X a share". This is a little more predictable, and if there is a better price out there you'll still get it.
• Be prepared to report your stock gains and losses to the federal government on your form 1040, schedule D. Or be prepared to hire a professional to do the same. It's kind of a pain. If you are currently using 1040EZ, be aware that luxury will be GONE.
  • (Your brokerage will mail you tax documents, typically form 1099, at the beginning of next year.)
  • If your state government has an income tax, you'll need to file a form there too (e.g. California form 540).

In this day and age, most brokers that you care about will be easily accessed via the Internet, the applications will be available on the Internet, and the trading interface will be over the Internet. There may also be paper and/or telephone interfaces to the brokerage, but the Internet interface will work better.

Be aware that post-IPO social media stock is risky; don't invest any money if you're not prepared for the possibility of losing every penny of it. Also, don't forget that a variety of alternative things exist that you can buy from a broker, such as an S&P 500 index fund or exchange-traded corporate bond fund; these will earn you some reward over time with significantly less risk. If you do not already have similar holdings through a retirement plan, you should consider purchasing some of these sooner or later.

Answer 2

Very simple. You open an account with a broker who will do the trades for you. Then you give the broker orders to buy and sell (and the money to pay for the purchases). That's it.

In the old days, you would call on the phone (remember, in all the movies, "Sell, sell!!!!"? That's how), now every decent broker has an online trading platform. If you don't want to have "additional value" and just trade - there are many online discount brokers (ETrade, ScotTrade, TD Ameritrade, and others) who offer pretty cheap trades and provide decent services and access to information. For more fees, you can also get advices and professional management where an investment manager will make the decisions for you (if you have several millions to invest, that is). After you open an account and login, you'll find a big green (usually) button which says "BUY".

Stocks are traded on exchanges. For example the NYSE and the NASDAQ are the most common US exchanges (there's another one called "pink sheets", but its a different kind of animal), there are also stock exchanges in Europe (notably London, Frankfurt, Paris, Moscow) and Asia (notably Hong Kong, Shanghai, Tokyo). Many trading platforms (ETrade, that I use, for example) allow investing on some of those as well.

Answer 3

Some good answers already, but let me add a TL:DR version.

Brokers work like a special type of bank account where you can deposit or withdraw money. The major difference is that they also give you the ability to buy/sell investments with the money in your account which you can do by either calling them or using their website.

Important: Many investments you will make through a broker(e.g. stocks) are not insured against losing value like the money in your bank account.

Answer 4

There are 2 main types of brokers, full service and online (or discount). Basically the full service can provide you with advice in the form of recommendations on what to buy and sell and when, you call them up when you want to put an order in and the commissions are usually higher. Whilst an online broker usually doesn't provide advice (unless you ask for it at a specified fee), you place your orders online through the brokers website or trading platform and the commissions are usually much lower.

The best thing to do when starting off is to go to your country's stock exchange, for example, The ASX in Sydney Australia, and they should have a list of available brokers. Some of the online brokers may have a practice or simulation account you can practice on, and they usually provide good educational material to help you get started.

If you went with an online broker and wanted to buy Facebook on the secondary market (that is on the stock exchange after the IPO closes), you would log onto your brokers website or platform and go to the orders section. You would place a new order to buy say 100 Facebook shares at a certain price. You can use a market order, meaning the order will be immediately executed at the current market price and you will own the shares, or a limit price order where you select a price below the current market price and wait for the price to come down and hit your limit price before your order is executed and you get your shares. There are other types of orders available with different brokers which you will learn about when you log onto their website.

You also need to be careful that you have the funds available to pay for the share at settlement, which is 3 business days after your order was executed. Some brokers may require you to have the funds deposited into an account which is linked to your trading account with them.

To sell your shares you do the same thing, except this time you choose a sell order instead of a buy order. It becomes quite simple once you have done it a couple of times. The best thing is to do some research and get started.

Good Luck.