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I've had some questions regarding stocks that have been bothering me for a while. They are naive, but that is the whole point: to understand what they are and fix my misconceptions.

  1. What is a stock?

I don't mean what it represents, but what is it. Is it a physical certificate you can show your family and friends? Is it a number in some database corresponding to your credentials? If you have 1000 google stocks, do you have 1000 pieces of paper? Is there a certificate with "1000 google stocks" on it?

  1. Where do I get a stock?

Do I need to go somewhere to buy a stock? Do I need to register an account on some website and hope it's legit, give it a whole bunch of personal details? If you buy a stock online, can you get a physical version of it?

I mean, I know for example, http://www.rbcdirectinvesting.com/services/onlineinvesting/account-open-or.html offers a service to buy stocks from, but $10 to just buy or sell a stock seems strange. Aren't there stocks that cost under $10? Wouldn't this discourage people from getting into trading stocks? Is this the intention? $20 just to buy and sell a single stock is really expensive for single buy-sell test to develop an idea of how/whether it works.

  1. Can anyone buy/own/use a stock?

Are there limitations to who can buy a stock? What if you give them away to somebody who can't, can they use it?

  1. How are stocks taxed?

I read that stocks are taxed, but I don't understand how it can be taxed if you don't give away information to how much you bought it for. Are you obligated to give the government information regarding my investing patterns? Also, what if you hold a stock for a really long time, and no longer remember what you bought it for exactly.

I know i'm asking a lot but it's been bothering me for a while and I appreciate any explanations given. I know much of this can be explained through Google but I am having difficulty understanding, as I have no idea what a broker is, there are too many places that claim to sell stocks, that I

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    For the tax question, what jurisdiction? – user662852 Dec 13 '15 at 12:36
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    Tax questions require that you specify your country. We have tags for that purpose. Please edit your question and clarify. – Chris W. Rea Dec 13 '15 at 16:21
  • You should consider using the mobile app, Robinhood, as a fun playground for learning about stocks. – Gabor Dec 13 '15 at 19:53
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What is a stock?

A share of stock represents ownership of a portion of a corporation. In olden times, you would get a physical stock certificate (looking something like this) with your name and the number of shares on it. That certificate was the document demonstrating your ownership. Today, physical stock certificates are quite uncommon (to the point that a number of companies don't issue them anymore). While a one-share certificate can be a neat memento, certificates are a pain for investors, as they have to be stored safely and you'd have to go through a whole annoying process to redeem them when you wanted to sell your investment.

Now, you'll usually hold stock through a brokerage account, and your holdings will just be records in a database somewhere. You'll pick a broker (more on that in the next question), instruct them to buy something, and they'll keep track of it in your account.

Where do I get a stock?

You'll generally choose a broker and open an account. You can read reviews to compare different brokerages in your country, as they'll have different fees and pricing. You can also make sure the brokerage firm you choose is in good standing with the financial regulators in your country, though one from a major national bank won't be unsafe.

You will be required to provide personal information, as you are opening a financial account. The information should be similar to that required to open a bank account. You'll also need to get your money in and out of the account, so you'll likely set up a bank transfer. It may be possible to request a paper stock certificate, but don't be surprised if you're told this is unavailable. If you do get a paper certificate, you'll have to deal with considerably more hassle and delay if you want to sell later.

Brokers charge a commission, which is a fee per trade. Let's say the commission is $10/trade. If you buy 5 shares of Google at $739/share, you'd pay $739 * 5 + $10 = $3705 and wind up with $3695 worth of stock in your account. You'd pay the same commission when you sell the stock.

Can anyone buy/own/use a stock?

Pretty much. A brokerage is going to require that you be a legal adult to maintain an account with them. There are generally ways in which a parent can open an account on behalf of an underage child though. There can be different types of restrictions when it comes to investing in companies that are not publicly held, but that's not something you need to worry about. Stocks available on the public stock market are available to, well, the public.

How are stocks taxed?

Taxes differ from country to country, but as a general rule, you do have to provide the tax authorities with sufficient information to determine what you owe. This means figuring out how much you purchased the stock for and comparing that with how much you sold it for to determine your gain or loss. In the US (and I suspect in many other countries), your brokerage will produce an annual report with at least some of this information and send it to the tax authorities and you. You or someone you hire to do your taxes will use that report to compute the amount of tax owed.

Your brokerage will generally keep track of your "cost basis" (how much you bought it for) for you, though it's a good idea to keep records. If you refuse to tell the government your cost basis, they can always assume it's $0, and then you'll pay more tax than you owe.

Finding the cost basis for old investments can be difficult many years later if the records are lost. If you can determine when the stock was purchased, even approximately, it's possible to look back at historical price data to determine the cost.

If your stock pays a dividend (a certain amount of money per-share that a company may pay out of its profits to its investors), you'll generally need to pay tax on that income. In the US, the tax rate on dividends may be the same or less than the tax rate on normal wage income depending on how long you've held the investment and other rules.

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    Also you only pay tax if you sell and make a capital gain or profit. If you don't sell you don't pay any tax. And usually (in some countries) you may get a discount on the tax payable if you hold the shares for more than 12 months. – Victor Dec 13 '15 at 9:48
  • Thanks for the well written answer. It seems to answer everything I wanted to know. Thanks. – Dmitry Dec 13 '15 at 14:58
  • Could also be worth noting that for the taxes section, dividends can also be another way to get taxed as some stocks may pay shareholders. – JB King Jan 4 '16 at 23:14
  • Good idea. I added a note on that. – Zach Lipton Jan 5 '16 at 7:33
  • I've never seen a broker that makes you pay a commission per individual share? It's always been per transaction, so if you bought 5 shares of Google at once, it'd only be 10 dollars total, but if you sold 2 of them a month later, waited another month, then sold the other three, you'd be charged the 10 dollars twice. I would also mention Motif, which only charges a transaction fee per "motif", which can contain up to 30 individual stocks each, and Robinhood, which is totally free. – neminem Jan 19 '16 at 16:11
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  1. Now a days, your stocks can be seen virtually through a brokerage account. Back in the days, a stock certificate was the only way to authenticate stock ownership. You can still request them though from the corporation you have shares in or your brokerage. It will have your name, corporation name and number of shares you have.

  2. You have to buy shares of a stock either through a brokerage or the corporation itself. Most stock brokerages are legit and are FDIC or SIPC insured. But your risks are your own loses. The $10 you are referring to is the trade commission fee the brokerage charges. When you place an order to buy or sell a stock the brokerage will charge you $10. So for example if you bought 1 share of a $20 stock. The total transaction cost will be $30.

  3. Depending on the state you live in, you can basically starting trading stocks at either 18 or 21. You can donate/gift your shares to virtually anyone.

  4. When you sell a stock and experience a profit, you will be charged a capital gains tax. If you buy a stock and sell it for a gain within 1 year, you will taxed up to 35% or your tax bracket but if you hold it for more than a year, you will taxed only 15% or your tax bracket.

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    I'll remark that this answer assumes U.S. regulation (FDIC, SIPC) and U.S. tax rules (15%, 35%, short/long-term). These points will not apply in other countries. – Chris W. Rea Dec 13 '15 at 16:22
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For point two..

The norm for buying stock is to just register online with a major broker: Fidelity, Schwab,TD Ameritrade...etc, send them money to fund your purchase, make the stock purchase in your account, and then have a little faith. You could probably get them to physically transfer the stock certificates from them to you, but it is not the norm at all. I would plan on a fee being involved also.

The 10$ is for one trade... regardless of if you buy one share or many. So you wouldn't buy 1 share of a five dollar stock as your cost would be absurd. You might buy a hundred shares.

  • Thanks for confirming. paying $10 to buy a 3 cent stock, then paying $10 to sell it does seem a bit excessive. Discouraging though, makes it hard to experiment in the environment. – Dmitry Dec 13 '15 at 7:13
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    If your goal is to experiment at that scale, you're much better off playing a virtual stock market game (just google "virtual stock market" and you'll find a number of free options) where you can make simulated investments with fake money. That way you aren't risking your own funds and can experiment while you learn more about the market. If you're buying a handful of shares with real money, commissions would likely kill any profit you hope to make. – Zach Lipton Dec 13 '15 at 8:51
  • Virtual experience is virtual, and I wanted a genuine experience. This experience appears more expensive than I initially thought but probably still worth going through once eventually. Thanks though. – Dmitry Dec 13 '15 at 14:56
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    @Dmitry trading real stock is essentially virtual too, so the experience is very similar. The issue is that, with a $10/trade commission, you need to be prepared to invest (and lose) enough to make it worthwhile. If you put in $100, your investment will have to appreciate 20% before you see any profit. A virtual stock game lets you play with a bigger bankroll without risking your money. It also gives you a chance to decide whether you should be trading individual stocks at all (hint: quite probably not, at least for the bulk of your money). – Zach Lipton Dec 13 '15 at 19:58
  • I get that. I just don't feel virtual stock games would let you have experience with the more frustrating parts of real stock trading. In addition, I can't imagine how a "stock game" would ensure that the experience is authentic, as real life stock trading is full of sketchy situations, and a game would need to deliver those as well to be genuine. Isn't a game programmed to be have in a predictable and expected way and fill the gaps with randomness? Real world's uncertainty isn't "randomly generated". Maybe i'm overthinking it and have no idea what i am talking about. – Dmitry Dec 15 '15 at 0:25
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  1. A stock represents your share of ownership in a corporation. All of these shares indicate towards your part of ownership in a corporation a shareholder, stockholder or a shareowner in a company.

  2. In order to get a stock, be sure to secure the assistance of a licensed stockbroker to buy securities on your behalf.

  3. Yes, anyone having substantial amount of money to invest can buy/own/use stocks.

  4. Holding a stock for less than a year makes it a subject to tax on your regular income for short-term gains. Most of the people find it higher than the capital gains. In addition, your annual income also comes into play.

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