What happens when you buy or sell stocks? Does it mean you have sold your shares back to the company? What if, what does that mean for you and what do you stand to gain? Normally, when you place a trade, you either buy or sell a financial instrument or asset. While you hear that they exist, buyers or sellers, how do they influence the market and its movements? We’ve discussed this relationship in this article and defined terms for ease of understanding.
Meanwhile, the stock market provides a platform where companies generate capital by selling shares of stock/equity, to investors. As a shareholder of company stock, you have voting rights as well as a residual claim on the corporate earnings in the form of capital dividends and gains.
Furthermore, both institutional and individual investors come together on several stock exchanges to buy and sell shares in a public market. Within this market places, have different types of stocks to choose from. While the market has also kept long records of each stock and commodity in metrics form of charts.
However, to know what actually happens when you buy or sell stocks continue reading.
What Is A Stock?
Stocks usually stand as financial instruments representing ownership in a company or corporation and a proportional claim on its assets and earnings. We also refer to stocks as shares or equity.
Thus, owning a stock more like means that a shareholder owns a slice of the company equal to the number of shares held as a percentage of the company’s total notable shares.
For example, an individual or entity having about 100,000 shares of a company with one million outstanding shares would have a 10% ownership stake in it.
What Is a Stock Exchange?
You can refer to stock exchanges as secondary marketplaces where existing shareholders can transact with potential buyers. You can find stock exchanges both online and offline.
Meanwhile, corporations you will find listed on stock markets do not typically buy and sell their shares but may engage in stock buybacks. Alternatively, they may issue new shares but these transactions and agreements occur outside of the framework of the exchange.
Types of Stock
You can find two major types of stocks namely;
Common shares have great similarities with Equities because both have a market value and trading volumes many times larger than those of preferred shares.
Generally, common shares usually come with voting rights that facilitate the common shareholder to have a voice in corporate meetings and elections. While preferred shares typically do not possess voting rights. However, preferred shareholders have priority over common shareholders to receive dividends (profits) as well as assets in the case where the company runs into liquidation.
Furthermore, we can classify common stocks in terms of voting rights. Some companies possess dual or multiple categories of stock with different voting rights tied to each class. For example in such a dual-class structure, Class X shares may have 10 votes per share, while Class Y shares may only have one vote per share.
In addition, companies have modeled both dual- and multiple-class share structures to allow the founders of a company to control its strategic direction, fortunes, and ability to innovate.
What Do ‘buy’ And ‘sell’ Mean In Trading?
We need to determine what happens when you buy or sell stocks. Hence, to do this we have to relate it to what happens when you open a ‘buy’ position, in any other regular financial market. Opening a ‘buy’ position essentially means buying an asset from the market. Likewise, when you close your position, you sell it back to the market.
Thus, when you open a position with your broker or trading provider, they will present you with two prices. If you intend to trade at the buy price, usually slightly above the market price, you open a ‘long’ position. While if you intend to trade at the selling price slightly below the market price you just open a ‘short’ position.
In addition, note that we refer to the difference existing between the buy and sell price as the ‘spread’. The provider takes the spread to enable the position.
What Is A Long Position?
In conventional trading, we refer to a long position as to buying an asset with the intention its price will rise. Hence, you can close or sell the position later for a profit. You can also refer to it as going long or buying.
However, entering a long trade doesn’t necessarily signify buying a physical asset. Derivatives like futures contracts and CFDs enable you to open a long position on a market without owning underlying assets.
What Is A Short Position?
On the other hand, short positions in trading include strategies used to take advantage of markets that will fall in price. When you take a short trade, it means you want to sell a borrowed asset in the hope that its price will go down. While you can buy it back later for a profit. We also refer to it as short-selling, shorting, or going short.
What Happens When You Buy or Sell Stocks?
If you have followed up carefully, you should actually know what happens when you buy or sell stocks now. Thus, when you buy a share of a stock, you typically own a proportion of the firm and an ownership stake in its assets. So let’s say you paid $1000 for a share of stock, and the stock appreciates by, say, 10% during the period you own it, you’ve profited $100 on your stock investment.
Similarly, you can take a short-selling position. Here you borrow shares from a broker and instantly sell them with the anticipation that the stock price will fall shortly after. If it works out, the trader can buy the shares back at the lower price, return them to the brokerage and save the difference as profit.
Frequently Asked Questions On What Happens When You Buy or Sell Stocks?
What actually happens when you buy a stock?
If you buy a share of a stock, you automatically own a proportion of the firm and an ownership stake in its assets.
What happens when I sell the stock and there is no one to buy?
This may occur in the case of very thinly traded stocks. So it rarely happens to sell stocks and see no one to buy. But in this case, when there exist no buyers, you can’t sell your shares. You’d have to hold on to it until someone/other investors become interested to buy. A buyer may pop in a few seconds, or it may even take minutes, days, or weeks.
Do you get taxed every time you sell a stock?
Yes, you will often get taxed if you sell the stock for more than you originally paid for it. Hence, you may have to pay taxes on your profits.
Conclusion
Finally, know that stock markets embody the heartbeat of the market, and experts and pros often use stock prices as a barometer to measure economic health. So, you’ve had to know what happens when you buy or sell stocks. Meanwhile, the significance of stock markets goes beyond mere assumptions. Hence, by giving companies the chance to sell their shares to millions of retail investors; stock markets also stand as an important source of capital for public companies.