What does it mean to buy or sell a stock?

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spareparts
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What does it mean to buy or sell a stock?

Post by spareparts »

My question may take your breath away in terms of total ignorance of how stock trading works, but if I "buy" a stock, who am I buying it from? In turn, if I "sell" a stock, who is buying it? You all are well within your rights to ridicule my question. But, this has bothered me since I was 8 years old. Who "buys" a stock when a private person sells it, who "sells" it when a private person buys it? Doesn't buying and selling involve two distinct entities?

In my simple mind, I go to a store and buy a gallon of milk. That store has arranged to procure and position into inventory that gallon of milk for resale purposes. They are selling me the milk. Or, I go direct to a farmer. I buy directly from him a gallon of milk. He gives me the milk, I give him money. That's fairly obvious to me.
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Re: What does it mean to buy or sell a stock?

Post by livesoft »

Here is a post where I sold some shares to myself which may illustrate an answer to your question:

http://www.bogleheads.org/forum/viewtop ... 9#p1488409

Oh, can you tell that in the same transaction, I bought some shares from myself?
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Re: What does it mean to buy or sell a stock?

Post by German Expat »

You always need a buyer if you want to sell a stock. There is a (finite) number of shares available and apart from a company issuing new shares or buying back their own shares this amount stay the same. So lets say in a very simplified way you have 10 shares owning company A. If you also want to own a part of company A you need to find a buyer or the other way around if you try to get out you need to find a seller. Now real life is much more complicated with actively managed funds, index funds, market makers (liquidity providers), short and long selling, straddles and what not else.

Now you can have public or private held companies and both can have shareholders. In your context you talk about publicly held companies but the principle is the same. Every seller needs a buyer.

Usually a company goes to the market with an IPO (initial public offering) and this is where the original owners / investors bring the company on the stock market (take it public) and sell shares. This is more then 400 years old with the first known being the Dutch East India Company.
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Re: What does it mean to buy or sell a stock?

Post by bottlecap »

You don't know who you're buying it from, but it does involve a buyer and a seller. It's just that most transactions are conducted through a broker, who arranges the sale between the two unidentified parties to the transaction. If you think about it, the grocery store in your example, is a broker of sorts. The difference is that they have a physical location to market the goods, forecast how much people in their area want to buy and actually purchase the goods from the farmer, whom you never meet. A stock transaction has a similar structure, except that in the usual case, the broker is not taking actual possession or ownership of anything. They are just taking orders and executing the orders as soon as they can fill them under the requested terms.

Does that help?

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Re: What does it mean to buy or sell a stock?

Post by EddyB »

If you are asking about a share that you may sell or buy on a stock exchange, then your broker is in most cases directly or indirectly completing your requested transaction (on the stock exchange) with a broker for someone who is interested in doing the opposite (e.g., buying what you want to sell). The stock exchange is the brokers' means of making or soliciting offers.
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Re: What does it mean to buy or sell a stock?

Post by Gropes & Ray »

OP, you've asked a great question. I encourage you not to be afraid to ask elementary questions. At the very least, those of us who knew already can benefit from the review.
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spareparts
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Re: What does it mean to buy or sell a stock?

Post by spareparts »

Maybe too hypothetical, but if there is a buyer and a seller for every transaction. if I want to sell a stock when it is "high," and maybe a lot of other people are thinking the same thing, would there really be a host of buyers out there for that many high priced shares? This is actually is what bothers me. It would seem the a high prices screams "sell" and not "buy". Who would buy under those circumstances? Is it possible to want to sell, but not find a buyer?
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Re: What does it mean to buy or sell a stock?

Post by DSInvestor »

spareparts wrote:Maybe too hypothetical, but if there is a buyer and a seller for every transaction. if I want to sell a stock when it is "high," and maybe a lot of other people are thinking the same thing, would there really be a host of buyers out there for that many high priced shares? This is actually is what bothers me. It would seem the a high prices screams "sell" and not "buy". Who would buy under those circumstances? Is it possible to want to sell, but not find a buyer?
maybe you're selling to a momentum investor who thinks it will go higher. You may think that Apple stock is high but others may think there's more upside.

If you cannot find buyers, you may have to lower your price to a level that it starts looking attractive to buyers.
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Re: What does it mean to buy or sell a stock?

Post by nisiprius »

I'm not quite sure how it works nowadays, but in the old days there were "specialists" or "market makers" whose job was to take the other side of the trade. It was purely a short term, momentary thing. You want to buy 100 shares of Stericycle at 1:19 p.m. and at that very instant there isn't anyone else around who wants to sell 100 shares, so the specialist, who owns an inventory of Stericycle shares, steps in and sells you 100 of his shares, confident that he will only need to wait a few minutes for someone who wants to sell so that he can buy them and replenish his inventory. In normal times with "orderly" trading this is a straightforward job.

(Google hits seems to be telling me it still works that way nowadays. Hard to believe).

When you think about it, it's the same question as "what does it mean to withdraw money from my bank account?" You know that when you bring your money to the bank it doesn't go into a Scrooge McDuck money bin. It goes out; they invest it. When you say "OK, I want my $10,000 back" they don't say "OK, we will go dip it out of the money bin." Nor do they say "OK, sit down and have some free coffee, and when someone comes in who wants to deposit $10,000 we will take it from them and give it you." They maintain a reserve to bridge the gap between the instant someone wants to withdraw money and the instant someone wants to deposit money.

And the point is: the liquidity of the stock market is a magnificent, well-maintained illusion, just like the illusion that you put "your" money "in the bank" and take it out again. During normal times, it works beautifully, and there is "a market price" and you can go ahead and place a trade without having to find a specific person who just happens to want to buy or sell right now--a specialist is always there and always wants to buy or sell right now. Or something like that.
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Re: What does it mean to buy or sell a stock?

Post by telemark »

Is it possible to want to sell, but not find a buyer?
As I understand it, sure. You (or more likely, your broker) submit a bid at a particular price on an exchange, for example the New York Stock Exchange, and either someone else accepts it or they don't. If no one accepts it you can try again with a different price. Most of this now happens through computer programs.

Edit to add: a supermarket is not a very close analogy. You're not going to bring your milk back a month later and ask if they want to buy it. eBay is a better example.
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Re: What does it mean to buy or sell a stock?

Post by Morik »

spareparts wrote:Maybe too hypothetical, but if there is a buyer and a seller for every transaction. if I want to sell a stock when it is "high," and maybe a lot of other people are thinking the same thing, would there really be a host of buyers out there for that many high priced shares? This is actually is what bothers me. It would seem the a high prices screams "sell" and not "buy". Who would buy under those circumstances? Is it possible to want to sell, but not find a buyer?
So a couple things.

1) Look at "volume" of a stock--this is a measure of how many shares are being traded around on a regular basis. The higher this is, the easier it is to buy or sell and the less it will generally cost you.
http://www.investopedia.com/terms/v/volume.asp
See also liquidity: http://www.investopedia.com/terms/l/liquidity.asp

2) bid/ask spread: this term measures the difference between what buyers are currently willing to pay and what sellers are currently willing to sell at.
I may be wrong, but I believe this is seen just by looking at the current limit & stop orders on the market. (Limit order means "I want to buy this stock, but I won't pay more than $X for it." or "I want to sell this stock, but won't sell for less than $X".)
http://www.investopedia.com/terms/b/bid-askspread.asp
http://www.investopedia.com/articles/trading/121701.asp

This comes into play when you tell a broker "buy this stock now, I don't care what price it is".
The displayed price of a stock (I'm guessing here) is going to be between the bid & ask somewhere. (Or maybe it is set at the bid or at the ask--not sure.)

Example: lets say there is a company XYZ.
One guy has 10 shares and has a limit order set up where he will sell his shares for no less than $100 each.
Some other girl has 10 shares and a limit order to sell for no less than $99 each.
Another person wants to buy 10 shares for no more than $97 each.
Another person wants to buy 10 shares for no more than $95 each.

Various scenarios:
- Lets say you have 15 shares. If you sell them right now ("market order"), then 10 would go for $97 and 5 would go for $95 (if the person wanting them at $95 was willing to take a partial order).
- If instead you want to buy 15 shares right now ("market order"), you would get 10 at $99 and 5 at $100.

If you are trading in high volume/liquidity stocks, there is basically always someone looking to buy it and someone looking to sell it. People and institutions have all sorts of limit orders set up. You'd have to have a TON of money to get to a point where you could buy more shares than are up for sale for many stocks, or sell so many shares that there aren't buyers.

If you are trading in low volume stocks, this can become more of an issue.
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Re: What does it mean to buy or sell a stock?

Post by ZiziPB »

spareparts wrote:Maybe too hypothetical, but if there is a buyer and a seller for every transaction. if I want to sell a stock when it is "high," and maybe a lot of other people are thinking the same thing, would there really be a host of buyers out there for that many high priced shares? This is actually is what bothers me. It would seem the a high prices screams "sell" and not "buy". Who would buy under those circumstances? Is it possible to want to sell, but not find a buyer?
In simple terms, if a lot of other people (potential buyers) are thinking the stock is "too high" then there won't be a lot of interest and the price will eventually go down. But remember, not everyone will think in the same terms as you are. You may be selling a stock that you think is "high" because you think it won't go higher so you want to lock your gains, but your buyer may be thinking that that stock still has a lot of room to go higher. But if there is a consensus among the buyers that the stock is overpriced then there won't be much demand for it at that high price and the price will go down.
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Re: What does it mean to buy or sell a stock?

Post by kaudrey »

Welcome!

As others have explained, in large markets there are generally always going to be buyers and sellers. Brokers work to match them. So, you are basically selling to a broker who will then sell to a buyer. This all happens electronically in a matter of seconds.

Is it possible to want to sell and not find a buyer? Yes, of course. In the broader context, this is supply and demand. If you (and lots of other people) want to sell, but a much smaller number of people want to buy, the stock price will fall until there are enough buyers for the stock. Meaning - at SOME price, there will be enough buyers to match the sellers. The reverse is also true - if there are lots of buyers but not a lot of sellers, the price will rise until enough people are willing to sell to meet the demand.
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Re: What does it mean to buy or sell a stock?

Post by celia »

It is easy to buy or sell (find a counterpart who will do the transaction with you) if you do the transaction at the current price. But if you decide to sell your shares for one million dollars a share, I doubt that there will be a buyer willing to do that transaction. In that case, the requested trade expires, either at the end of the day or after 60 days, whichever you requested when you submitted your "sell" order. So if your requested price is not near the going price, you will not be able to sell.

The same thing goes if you want to buy shares for a penny. There are a few companies whose stock is a penny, but these tend to be "junk" investments or companies in distress.
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Re: What does it mean to buy or sell a stock?

Post by spareparts »

Thanks to all for the meaningful (and non-vilifying) remarks. It makes sense that the market is so large, that a buyer seller deficit is rarely encountered on high volume items. It helps me understand certain instances where a company will "take over" another and pay something other than the current stock price. That makes sense too, because shareholders need to be enticed to sell under that circumstance; there's simply not enough available to make an immediate takeover viable. Thanks for helping demystify a bit of the stock trading world for me.
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Re: What does it mean to buy or sell a stock?

Post by skepticalobserver »

Equities increase in value when there are more buyers than sellers; they decline in value when sellers out number buyers. End of story. There's a vague wrong-headed notion that "technicals" and/or "fundamentals" move an equity's price. There's nothing organic about these things. Markets fluctuate on fear and greed. Wall Street tells a good story to get you in the game. To believe stock ownership has a meaningful connection to an issuer is like thinking you control the sun because you can block the rays with your hand.
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Re: What does it mean to buy or sell a stock?

Post by richard »

skepticalobserver wrote:Equities increase in value when there are more buyers than sellers; they decline in value when sellers out number buyers.<>
Pricing is a function of supply and demand, but it's not the number of buyers and sellers.

Consider the market for milk, as a random example. There are a lot more people who want to buy milk then there are sellers of milk. The price can fluctuate over time even if the number of buyers and sellers remain constant. Equity markets are not fundamentally different.
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Re: What does it mean to buy or sell a stock?

Post by skepticalobserver »

[
richard wrote:Pricing is a function of supply and demand, but it's not the number of buyers and sellers.

Consider the market for milk, as a random example. There are a lot more people who want to buy milk then there are sellers of milk. The price can fluctuate over time even if the number of buyers and sellers remain constant. Equity markets are not fundamentally different.
Certainly there's a fundamental difference. Milk sellers can increase or decrease the amount of milk they wish to produce based on demand. On the other hand, my comments assume that, as in most instances, there are a fixed number of shares for any particular equity/CUSIP. Issuers don't open or close the spigot of shares based on marketplace demands, "rights" offerings and other shenanigans aside.

Volume (demand, or not) sets the price as well as the spread.
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Re: What does it mean to buy or sell a stock?

Post by CABob »

You have received a number of good responses to your question, but, let me add to the above. In any transaction there is a buyer and seller. If you are the seller you don't generally know who the buyer is. It may be another individual investor such as yourself or it may be a large mutual fund, endowment fund, or the corporation may be buying their own stock. Something to keep in mind is that when a buyer and a seller (or the market) agree on a price both think they have gotten the best side of the deal.
In my mind, this is the reason that I think it is difficult to make short term gains in individual stocks and I always question the statement, "Its a stock pickers market."
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Re: What does it mean to buy or sell a stock?

Post by richard »

skepticalobserver wrote:[
richard wrote:Pricing is a function of supply and demand, but it's not the number of buyers and sellers.

Consider the market for milk, as a random example. There are a lot more people who want to buy milk then there are sellers of milk. The price can fluctuate over time even if the number of buyers and sellers remain constant. Equity markets are not fundamentally different.
Certainly there's a fundamental difference. Milk sellers can increase or decrease the amount of milk they wish to produce based on demand. On the other hand, my comments assume that, as in most instances, there are a fixed number of shares for any particular equity/CUSIP. Issuers don't open or close the spigot of shares based on marketplace demands, "rights" offerings and other shenanigans aside.

Volume (demand, or not) sets the price as well as the spread.
If you don't like milk as an example, pick something which takes a longer time to change quantity.

Numbers of shares are fixed in the short run, but not in the longer term.

If the number of buyers and sellers were key, 100 buyers of 10 shares each would have more influence than one buyer of 100,000 shares. It's a lot more than just the number of buyers and sellers. You might want to consider the shape of supply and demand curves, etc. See, for example, http://www.investopedia.com/university/ ... omics3.asp
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Re: What does it mean to buy or sell a stock?

Post by telemark »

CABob wrote:Something to keep in mind is that when a buyer and a seller (or the market) agree on a price both think they have gotten the best side of the deal.
Usually. Sometimes people have to sell to raise money, even when no one particularly wants to buy. This drives down the price and in the worst case leads to other owners facing margin calls. That's how we get panics.

Buying is always a choice. Selling may not be.
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Re: What does it mean to buy or sell a stock?

Post by skepticalobserver »

Richard:

Certainly, the number of shares that are bought and sold is determinate. I think "volume" covers it.

A share of stock is not an organic substance. No spontaneous generation. Time won't change a thing in this regard. A chart of volume might suggest a pending change in price, if your a technician, but the number of shares are still fixed. A closed-end fund is a good analogy.
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Re: What does it mean to buy or sell a stock?

Post by telemark »

telemark wrote:Buying is always a choice. Selling may not be.

If you're shorting a stock -- if you borrowed the stock and sold it, and now the time to return it has arrived -- then you have to buy at whatever price the market will give you, whether you like it or not. So there may not be a choice on either side of the transaction.

Can anyone explain how it's possible to sell stock you don't own? I've never understood that. If I sell a car or a house I have to demonstrate title to it, but stocks seem to work differently.
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Re: What does it mean to buy or sell a stock?

Post by grabiner »

spareparts wrote:Maybe too hypothetical, but if there is a buyer and a seller for every transaction. if I want to sell a stock when it is "high," and maybe a lot of other people are thinking the same thing, would there really be a host of buyers out there for that many high priced shares?
People buy and sell stocks for a variety of reasons, not all of them related to the price. Working investors are saving for retirement, and will buy stock (likely indirectly, as they buy mutual funds in their IRAs and 401(k)s, and the mutual funds buy stock). Retirees who own stock need to sell some to meet their living expenses.
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Re: What does it mean to buy or sell a stock?

Post by grabiner »

telemark wrote:If you're shorting a stock -- if you borrowed the stock and sold it, and now the time to return it has arrived -- then you have to buy at whatever price the market will give you, whether you like it or not. So there may not be a choice on either side of the transaction.

Can anyone explain how it's possible to sell stock you don't own? I've never understood that. If I sell a car or a house I have to demonstrate title to it, but stocks seem to work differently.
The economics of a short sale is that it is a contract. A short seller agrees to receive an amount equal to the price of a stock, pay any dividends due, and buy the stock back at a later time (likely negotiated with the broker, who can call in the contract if there is a risk that it will not be fulfilled.)

The mechanics of a short sale are that the actual share is borrowed. A buys a share of stock, which is held in a margin account at a brokerage. B wants to sell the stock short. B borrows one share from the brokerage, and sells it to C. Thus C holds the stock, and doesn't know that it was bought from a short seller; C has the rights of ownership and can vote the stock. A no longer has an actual stock, but has a contract with B (through the brokerage) to receive a payment in lieu of dividends. If A wants to sell the stock, B and the brokerage must come up with a share somehow; B could buy the share back from A (closing the short position), or the brokerage could lend out D's share instead of A's share.
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Re: What does it mean to buy or sell a stock?

Post by AAA »

skepticalobserver wrote:Equities increase in value when there are more buyers than sellers; they decline in value when sellers out number buyers.
These statements may confuse the OP. There are always an equal number of buyers and sellers since when one sells a stock someone else is buying it.

If at any given time more people want to buy a stock than there are people who want to sell, the price of the stock will increase until holders of the stock are convinced to sell it. And vice versa.

I always find it funny to hear the news reports of "heavy selling" on Wall street. That means there was also heavy buying. But of course at lower prices.
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Re: What does it mean to buy or sell a stock?

Post by telemark »

grabiner wrote:The mechanics of a short sale are that the actual share is borrowed. A buys a share of stock, which is held in a margin account at a brokerage. B wants to sell the stock short. B borrows one share from the brokerage, and sells it to C. Thus C holds the stock, and doesn't know that it was bought from a short seller; C has the rights of ownership and can vote the stock. A no longer has an actual stock, but has a contract with B (through the brokerage) to receive a payment in lieu of dividends. If A wants to sell the stock, B and the brokerage must come up with a share somehow; B could buy the share back from A (closing the short position), or the brokerage could lend out D's share instead of A's share.
Thanks.
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