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 fullservice, 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

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


techniques
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