Certificate of Deposit

Archive for March, 2008

Question: Where does the money go when somebody buys stock?

Silly question, but would like clarification. Say I’d like to buy XYZE stock at 10 bucks a share. I want one thousand shares. Now, this is ten thousand dollars I have to come up with. So, I open an account with an online broker, deposit 10 grand and change for the trade. The check is made out to the online broker. They then execute my order and send me a confirmation. No certificates involved. So, what did the broker do with my money? If my stock tanks, and goes belly up due to a hedge fund shorting, or whatever reason, I lose my cold hard cash I invested. If it goes up to 100 bucks a share, due to zero interest money propping up the market, or whatever, I make alot of money when I sell it. I want my dough, and I want it now, so I have the brokerage account mail me a check. The check comes from the online broker, not the invested company. So, basically, does the broker buy my stock from the company, or does it hold onto the money in their interest account?

Answer: Owning common stock is owning a piece of the company. Companies issue shares and the total number of shares issued is called the float. You can look this up on Yahoo Finance if you type in the symbol and look under Key Statistics.

Shares are traded on one or more exchanges eg. NYSE, AMEX and NASDAQ. When you buy from an online broker (or any broker), they open an account for you. The actual shares held in a depository bank for all customers of that broker. You can request a certificate if you like but the chances of you losing it are probably greater and they will charge you a fee.

The key to owning common stock is to buy companies that you know will not go under. The most common reason why companies fail is having too much debt. If you invest in a company with little or no debt, your chances of it going to zero are very slim.

So buy companies with good products, and buy them on days when the market is down big.
Expect to hold it for 3 to 5 years. If you can’t do this, you should put your money elsewhere.

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