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What Does It Mean to Make a Stock Trade?

Aug. 29, 2014
Brokers, Investing
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Making a stock trade essentially signifies that you own a small sliver of a large company pie. Stocks are a type of security that gives the investor a share of ownership in a company. The number of shares you own in a company, as compared to the total number of outstanding shares for the company represents your claim to the company’s assets and earnings.

When you hold company stock you are just one of many shareholders who have a claim to everything the company owns. Investors purchase stock for two main reasons: to make money and to have influence in the company.

The longer you hold a stock, the more potential it has for capital appreciation and a strong return. But stocks fluctuate in price, and there’s no guarantee the company you have invested in will do well over time. Investors who hold stock in well-performing companies can also make money through dividend payments, which are issued when a company distributes some of its earnings to its stockholders. The amount you would receive is based on the dividend paid per share multiplied by the number of shares you own.

There are two kinds of stock: common stock and preferred stock. Owning common stock in a company gives investors the right to vote on corporate policymaking and to receive dividends. Those who own preferred stock generally don’t have voting rights, but do have priority over common stockholders when it comes to receiving dividend payments as well as any payments distributed if a company goes bankrupt and its assets are liquidated.

» MORE: How to Buy Stocks

What happens when you make a trade?

When you decide to make a trade you can issue a market order with your brokerage firm that signals you would like to purchase X number of shares in a stock. That order won’t be completed instantaneously, though it may seem very quick. Instead, your order will be sent to a particular market first to find a seller.

When you issue that market order, you are agreeing to purchase the stock at the price available when the order is executed. Share prices reflect both the growth that investors expect in the future and the value of the company. Since prices of stock are constantly shifting, the price of a stock at the time of execution may be slightly higher or lower than the last traded price available when you make the initial order.

Once you issue a market order, it is guaranteed to execute, no matter where the price ends up. You may have the option to issue a limit order to set a limit to the maximum you pay for a stock, but limit orders usually carry a higher fee and don’t guarantee your order will be executed.

Mutual funds

Investing in a mutual fund enables you to invest your money without having to choose individual assets. Mutual funds pool money from multiple investors to invest in a large group of assets, such as stocks, bonds and short-term debt, collectively known as a portfolio. When you invest in a mutual fund, rather than an individual stock, you own a piece of the fund, not the assets it holds. Though you don’t own the mutual fund’s assets, the value of those assets is directly tied to the value of the fund and subsequently, your shares.

Shares in mutual funds are affordable, easily redeemable, provide streamlined professional management and allow you to easily diversify your portfolio. Diversification is important to mitigating investment risk since smaller amounts of your money will be tied to several companies, rather than all of your money being tied up in one company. Since the fund you invest in owns multiple assets, when you invest in a mutual fund, you immediately diversify your portfolio.

Mutual funds are often considered open-end, so this means if you’re interested in investing in the fund a new share will be created for you to purchase. Regardless of how assets perform, you will have to pay fees and expenses associated with the fund.

Investors earn money from mutual funds in three ways: from dividend payments; from capital gain, when a fund sells a security that has increased in price; and via Net Asset Value—when the NAV of a fund increases, the value of your shares increases.

Trader image via Shutterstock.