Okay, now that we know what a stock exchange is, how does one go about buying a stock? Can we just call up IBM and say, “Hi, I would like to buy 100 of your shares?” No, we cannot do that. What we need first is someone called a broker, because it is the broker who actually places a trade for us. It works like this:
If you wanted to buy car insurance from Allstate, you wouldn’t call their home office; you would call your neighborhood Allstate agent. You would tell him what you want, and HE would place the order with the home office. The markets work the same way. You need a stockbroker who you call and tell what you want to buy or sell, and he or she in turn places the order with a trader at the exchange (Or in the case of the NASDAQ, simply sends the order electronically). For doing this the broker receives a commission (in real money) for placing the trade. There are hundreds of brokerages now, offering everything from fast execution (of your order) to very complicated research facilities. Which one is right for you? This will be the toughest part of the game for you. You see, there is no “perfect” brokerage. Each one offers something, but to get all the services that you might require may require having more than one. Here is why:
First, we have to take into consideration the price (commission) that the broker is going to charge you to make a buy or sell. Some of the older, established financial houses still charge the upwards of 200 dollars per trade!! We are not interested in that! Some of the deep-discount brokerages are good bets, and charge between about 20-35 dollars per trade. What we are looking for is a brokerage that 1) is inexpensive enough; 2) DOES trade options (some don’t); 3) will “fill” your order quickly. The last part–#3–is probably the most important of all!! The reason: when you want to buy a stock, you are buying it probably with the intent of selling it when it goes up in price. So the last thing you need is to be dealing with a broker who cannot execute or “fill” your order very quickly.