How to Buy Stocks

Shares of stock represent ownership of the underlying company. When you buy 100 shares of stock on the New York Stock Exchange, for example, you actually own a very small percentage of a company. To buy stock, all you have to do is find a seller and exchange cash for his shares. For public companies, this process is streamlined on the stock exchanges, but the principle holds true when you buy privately held stock as well. In a few instances, there are ways to buy stock directly from a company.

stocks on LCD screen

Opening An Account

To buy stock in a public company, you have to open an account with a brokerage firm first. There are a variety of types of brokerage firms, from old-line, full-service firms to online brokerage houses. Once you open an account and place an order, the firm execute your trades on your behalf, typically for a fee or commission.

Stock Exchanges

When you buy publicly traded stock, you buy it from a seller, not from the company directly. Matching buyers and sellers is the main purpose of the New York Stock Exchange and the NASDAQ Stock Market, which are the two largest stock exchanges in the world. Every day, billions of individual shares of stock are traded on these exchanges as buyers and sellers meet and make transactions.

Types of Orders

If you simply want to buy a stock at the current market price, enter a "market" order. If you don't want to pay more than a certain amount, enter a "limit" order, with the limit being the highest dollar amount you're willing to pay.

For example, let's say a stock is trading at $100 per share. If you enter a market order, your trade will execute at $100 per share. If you think that price is too high, you can enter a limit order at a price of $98. If the stock trades down to $98, the trade executes at $98. While everyone would rather pay $98 per share than $100, the risk with a limit order is that the price never trades down to $98 and simply goes higher.

Initial Public Offerings

One of the few times you can buy stock directly from a company is when it first begins trading on a public stock exchange, in a process known as an initial public offering. Proceeds of an IPO go directly to the company and its original shareholders, rather than anonymous sellers on a stock exchange. Shares can be hard to find in an IPO because demand is often high. However, once a company goes public, stock is readily available on the stock exchange from other sellers.

Direct Stock Purchase Program

Some companies offer direct stock purchase programs in which you can buy shares directly from the company. In these programs, companies will often reinvest dividends for you in additional shares of stock, something you can't typically do with shares bought on the stock exchange. Share purchases are also often low-cost or even commission-free. The downside is that you don't know what price you'll be paying for your shares, as it can take days or even weeks between the time you send your money to the company and the time your trade is executed. The same is true with sell orders.