Chapter 9 Section 9.3 – Buying and Selling Stock

 How to describe how stocks are bought and sold  How to explain the trading techniques used by long-term investors and short-term speculators

 You can cut costs by buying and selling stocks efficiently. Using various strategies for investing can increase your total return on investments

 To buy common or preferred stock, you usually have to go through a brokerage firm and the brokerage firm must buy the stock in the primary or secondary market.

 Primary market – market in which an investor purchases securities from a corporation through an investment bank or some other representative of the corporation  An investment bank is a financial firm that helps corporations raise funds, typically by selling new securities  An initial public offering (IPO) occurs when a company sells stock to the general public for the first time To fund new business start-ups or to finance new corporate growth and expansion

 After stocks are sold on the primary market, they are sold in the secondary market. The secondary market is a market for existing financial securities that are currently traded among investors.  Secondary Markets include  Securities Exchanges  Over-the-Counter Market  Account Executives  Brokerage Firms

 Securities Exchanges - marketplace where brokers who represent investors meet to buy and sell securities. These include the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX).  First have to be registered with the exchange on which they will be traded  NYSE is one of the largest Must have a very large capitalization and trade many shares

 Over-the-counter (OTC) market— a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange. Most OTC stocks are traded through NASDAQ.  Electronic marketplace  Many forward-looking companies trade on NASDAQ, many are fairly small, but some very large companies are also traded on NASDAQ Microsoft, Intel, and MCI

 Account executives—or stockbrokers, are licensed individuals who buy or sell securities for clients  Deals with all types of securities and can handle your entire portfolio (consists of all the securities held by an investor)  Stay actively involved in decisions about your investments; never let a stockbroker take action on your accoutn without your permission  Be aware of churning – when an account executive does a lot of buying and selling of stocks within your portfolio to generate more commissions (a fee charged by a brokerage firm for buying/selling of securities)

 Brokerage Firms - can be either full- service, discount, or online, depending on services provided and fees charged. The biggest difference is the amount of commission you will be charged when you buy or sell securities.

 Most investors trade stock either over the telephone or on the Internet  You can also go to a brokerage firm to place your order  Market order – a request to buy or sell a stock at the current market value; the account representative will try to get the best price possible and make the transaction as soon as possible

 Limit order – a request to buy or sell a stock at a specified price; you will agree to sell at the best price but not below a certain price or agree to buy at or below a certain price  Does not guarantee that the purchase or sale will be made  Limit orders are filled in the order in which they are received

 Stop order – type of limit order to sell a particular stock at the next available opportunity after its market price reaches a specified amount  Does not guarantee that it will be sold at the price you specified but it does guarantee that it will be sold at the next available opportunity

 Commission Charges – brokerage firms charge a minimum…most are $25 - $55 for buying and selling stock  Additional fees can be charged based on the number shares and the value of the stock  Stocks are traded in round lots—100 shares or multiples of 100 shares of a particular stock  An odd lot contains fewer than 100 shares

 Long-term techniques  Buy and hold technique – buy stock and hold on to it for a number of years  Dollar cost averaging – buy an equal amount of the same stock at equal intervals  Direct investment and dividend reinvestment plan – automatically reinvest any dividends you earn by buying more shares

 Short-term techniques  Buying stock on margin – when an investor borrows through a brokerage firm part of the money needed to purchase the stock, but you have to have at least $2000 in your brokerage account Used to be able to buy more shares  Selling short – selling a stock that has been borrowed form a brokerage firm and that must be replaced at a later date…you sell the stock you have borrowed today, knowing that you’ll have to buy the stock at a later date