Publicly traded stocks change hands in public stock exchanges, such as the New York Stock Exchange and the London Stock Exchange. As an individual investor, you cannot buy or sell stocks in these exchanges directly, and need to use the services of a broker dealer. Privately held stocks, however, are a different matter; they can be purchased without an intermediary, free of charge.
A public stock exchange is a meeting place for buyers and sellers of a variety of financial instruments, including stocks and bonds. Since thousands of stocks trade on large exchanges and millions of trades occur every single day, these transactions have to follow strict rules to avoid chaos. Only a limited number of licensed brokers can access and directly trade on public stock markets. Before the computer age, financial transactions used to occur face to face between representatives of brokerage firms, also known as floor brokers. Today, these exchanges occur almost exclusively in an electronic environment. The basic principles, however, remain the same. To ensure proper recordkeeping and compliance with all financial regulations, only licensed brokerage firms and their representatives can execute trades.
Fees and Commissions
When you wish to buy or sell a stock or bond in a public stock exchange, you must place an order through your broker. Unlike the old days, when you had to fill out a paper form or place a call, today investors almost always place their trade orders through the Internet. If you wish to buy shares, the broker locates a seller willing to transact at your price. Brokers must pay a small fee to the stock exchange for each transaction and have other costs, such as overhead and salaries of their employees; in turn, the brokers charge a commission for buying and selling stocks for you.
Additional Brokerage Services
In addition to acting as an intermediary during the purchase or sale of financial instruments, the broker keeps your investments safe and handles a variety of functions. When the stock's issuer distributes part of its profits to shareholders in the form of cash dividends, for example, the broker collects and deposit this cash into your account. When a stock splits, which means that each existing share is replaced by multiple new shares, the broker handles this exchange at no cost to you. Considering all that you get from a broker, the stock trading commissions are generally modest.
Most companies on earth are privately held. In other words, their stocks do not trade in public stock markets. You cannot just log on to a finance portal, such as Yahoo or Google Finance, and obtain a recent market price for such stocks. To buy such shares you must locate the individuals who hold the shares and negotiate with them directly. Since no intermediary is involved in such transactions, you pay no fees or commissions. However, you may also be stuck with such shares for years when you need to sell them, and must keep them safe on your own. Shares of privately held companies are rarely suitable investments for novice investors.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.