How to Choose & Deal with a Stock Broker
Buying stocks isn't hard, but the process has its own rules, its own language and a special cast of characters.
What are Stocks?
A Certificate whose value is recognized by the investor and the organization, in other words they are also called as payer and payee. Stocks are also called as scrips. Scrip is not currency but may be convertible into currency. It is a formal declaration that documents a fact of relevance to finance and investment for which the holder has the right to receive interest or dividends.
To purchase stock, you we normally use a traditional or online brokerage firm. . Its an investment firm that is licensed to buy and sell securities. These firms are licensed by the Securities and Exchange Commission which is also known as the SEC. These firms from which we you purchase stocks are called as Broker Dealers.
There are a lot of brokerage firms that extend their services to the customers apart from buying and selling stocks. They offer research based services. These researches are conducted by them from time to time on the changing market conditionsThey offer research based services based on the changing market conditions from time to time. These information are very useful for the customers when they place orders for stocks. They also develop long term and short term investment goals for their customers. This helps the customer to know what his portfolio comprises of.
These people carry out transactions for their clients. . They do not offer comprehensive services like the discount brokers. They offer only less personalized services. The commission charged by them is very less when compared to the full service brokerage firms. There are deep discount brokers whose commission is very less when they trade with experienced investors who deal in large blocks of stocks.
Apart from the above methods of purchasing stocks which is conventional, customers can also trade in securities online. There are a lot of established full-service brokerage firms and discount brokerage firms who offer substantial discounts to their customers who buy and sell online. .
Commission and where does it go?
The brokers generally charge a commission for the orders placed by the customers, be it buying stock or selling stocks. The commission you pay for it is divided by a prearranged contract between your broker and the brokerage firm. The commissions and any additional fees are generally set by the firm, however your broker maybe able to give you a concession or a leverage on the fees if you trade with them very often and in large volumes. Generally the norm goes this way higher the standard fee, the more you negotiate.
Different Ways to Purchase Stocks
You may also be able to buy stock directly from the company that issues it. . You can purchase it through a Direct Stock Plan or a Dividend Reinvestment Plan which is also called as the DRIP. . A lot of large organizations offer these plans and charge a minimal fee to handle all the transactions.
Purchase through a Broker / Mediator:
Even though we you probably use the term broker / mediator to describe the professionals who buys and sells stocks, the financial markets use titles to describe more precisely the ways all the stocks or scrips change hands.
They are as follows:
Brokers : They
handle, buy and sell orders placed by individual customers and organizational
clients :. They usually charge a commission on each transaction however they also sometimes receive an annual fee based on the value of the clients / organizations account
Dealers : These people buy and sell stocks for their own or their firms account. . They help to keep the market liquid. Dealers make their money on the difference between what they pay to buy a security and the price they get for selling it. These people normally have sound knowledge about the markets
Traders : They are also called as registered traders or competitive traders . They buy and sell stocks for their own portfolios.. The term trader also describes those employees of brokers / dealers who handle the firms stocks trading
Types of Orders
When the Customer places an order to buy or sell a particular stock at that current price, which is called the current market price, the customers order is called a market order.. The price he pays (or what he gets) is usually the same or close to the quote hes been given when he places the order.. It totally depends on how quickly the transaction is handled and how actively the stock is traded.
There are two other types of orders which is called a Stop Order and a Limit Order.
Stop Order: This instruction is given by the customer to the broker to buy or sell stocks once it hits a specified target price.. This specific target price is called the stop price.. Stop Orders are generally placed to curtail the losses or protect the profits made till then on those stocks.. Their disadvantage is that, they maybe executed at a price higher or lower than the stop price since the stock trades at the current market price after it hits the stop price.
Limit Order : This instruction is given by the customer to the broker to buy or sell stocks only at a specific price or better. . This price is called the limit price.. A limit order is not a market order. So the customers will pay more or sell for less than he wanted, however if the prices changes quickly, the customers order may not even go through even if the price was actually at that limit for a time.
What is a Good till Cancelled (GTC)?
Normally when a customer places a stop order or a limit order, the broker will ask him if he wants a Good Till Cancelled. . This is also called as a Day Order.. A GTC traditionally lasts until it is either filled or the customer cancelled it. . A few firms keep them on their books only for 90 days before they expire. . These kinds of orders are canceled cancelled automatically if its not filled by the end of the trading day.
However the customer cannot place a Stop Order or a Limit Order if he is buying stocks directly from the organization. This is an arrangement which can be facilitated only when he buys stocks from a broker.
Investments play a huge part not only in an organization, but also for individuals. . Careful planning is required before making an investment. A customer or an organization must carefully analyze the different methods in which an investment can be made and the most cost efficient and most profitable method must be taken into consideration. A detailed market analysis must be made before making an investment. There are brokerage firms who cater to these services. . A customer must make efficient use of all the services provided to him. A careful investment and an analytical one are sure to fetch the investor rich dividends.