One key aspect of investing that is sometimes overlooked is the way different securities are bought and sold. With the introduction of lower commission rates, loosening of regulatory regulations, and increased public interest in investing, the financial industry is booming with different avenues for buying and selling stocks, bonds, and mutual funds.
In North America, you can trade investment securities through the following four ways:
- The company that issues them
- Individual investors
- One of the most common and easiest ways of buying and selling stocks, mutual funds, and bonds is through a brokerage house.
- More often than not, the method of transacting directly with the issuing company is more difficult than buying and selling securities through a broker.
- Although most banks don't sell stocks, they do offer mutual funds and bonds.
- There are many ways to buy and sell securities; each comes with its own advantages, challenges, and risks.
One of the most common and easiest ways of buying and selling stocks, mutual funds, and bonds is through a brokerage house. Brokerage firms typically require you to open an account with them and deposit a certain amount of funds as a show of good faith. Brokerages are popular because they (rather than you) do much of the behind-the-scenes work, such as completing the necessary paperwork and ensuring timely dividend payments. Choosing the right broker is an important first step for new investors.
Historically, the primary way for investors to enter into the securities market was to simply contact their full-service brokers and have them purchase different stocks and bonds on their behalf. Because of the personal relationship that often develops between investor and broker, full-service brokers typically call their clients and provide recommendations for buying or selling particular securities.
Discount brokerages have become increasingly popular with investors thanks to ever-decreasing commission fees. These brokerages, like large supermarkets, offer investors a huge selection at a low cost. However, investors have to do most of the work themselves. At almost all discount brokerages, you can buy stocks, bonds, or mutual funds either by calling one of the investment representatives—who will collect a commission—or completing the transaction yourself online.
Either way, you'll need to enter an order ticket, which states the type of security you want to purchase (bond, stock. or mutual fund), the price you want to pay for it, the quantity you would like to buy, and the duration for which you would like to leave the order active (e.g., one day to one month). Upon proper completion of the order, the order is sent to the exchange, where the stock, bond, or mutual fund is bought or sold at whatever terms are on the order ticket.
Directly From the Business
More often than not, the method of transacting directly with the issuing company is more difficult than buying and selling securities through a broker; albeit transacting directly does have advantages.
When evaluating this transaction method, the first thing to consider is whether you are comfortable holding the securities yourself? When you buy stocks or bonds directly from the issuer, they will be held in certificates, either in registered or bearer form.
If your purchase is in bearer form, the issuing entity does not keep any records of transactions, which means that you are responsible for the safekeeping of the security. If you lose a security in bearer form, there is no way to retrieve it; the person who finds it is the proud new owner of your stock. This issue doesn't arise with mutual funds because you don't actually hold units individually.
Secondly, do you need access to the funds immediately? With the sale of mutual funds, you typically can receive cash three days after the transaction date. The wait for funds from the sale of stocks or bonds, however, can be significantly longer. For example, if you want to sell instruments that are in registered form, you have to sign the back of each certificate and send it back to the issuing company before you can receive any cash.
Lastly, how important is the price of purchase or sale to you? If you like to buy stocks, bonds, and mutual funds for the cheapest possible market price, dealing directly with an issuer may not be for you. When you buy stocks or bonds directly from an issuer, you will typically have to buy them at a price set by the issuer, and sell them back at another set price.
Given all of the above concerns, why would anyone want to buy and sell directly? Unlike brokerages which may require a minimum dollar purchase amount, businesses typically have few restrictions on the minimum number of units being purchased. Additionally, you don't need to have an account, which sometimes requires a minimum balance and penalizes long-term investors with inactivity fees.
Although most banks don't sell stocks, they do offer mutual funds and bonds. That said, their selection will be limited to funds offered by the bank itself or through its partners. On the plus side, ease. You can simply walk into just about any corner bank and purchase mutual funds or bonds on the spot.
A bank representative should be able to tell you the different characteristics and minimum purchase amounts of the products available.
In theory, you can buy and sell securities individually (outside of an exchange). Suppose that a friend has a stock that you would like to buy, or a relative who needs the funds immediately would like to sell you a bond. It can be done, but beware of scams, such as false certificates.
With most stocks and bonds, as the buyer, the other party will have to sign the certificates over to you. If you'd like to sell, you only have to sign the back of the certificates, which can then be sold to another party. In either scenario, after the security certificates are signed, they must then be sent back to the company, to be re-registered under the name of the new owner.
The Bottom Line
There are many ways to buy and sell securities; each comes with its own advantages, challenges, and risks. Whether you decide to deal with a full-service or discount broker, issuing company, bank, friend, or relative make sure that you've done your homework and identified the route that is best for you.