How Does Someone Actually Transact Securities?

One key aspect in investing that we sometimes overlook is how to buy different securities. With the introduction of lower commission rates, loosening of regulatory regulations and increased public interest in investing, the financial industry is blooming with different avenues for buying and selling stocks, bonds and mutual funds. In North America, there are four main avenues of transacting investment securities: 1) through brokerages, 2) directly from the company that issues them, 3)through banks and 4) through individual investors.

Brokerage Houses
One of the most common and easiest ways of buying and selling stocks, mutual funds and bonds is through a brokerage house. These companies typically require you to open an account with them and deposit funds as an act of good faith. Brokerages are popular because they, rather than you, do much of the "behind the scenes" work, allowing you to just focus on when and what to buy or sell. They look after things like completing the paperwork involved in transferring the ownership of stock and ensuring dividend payments.

Brokers are classified into two different classes. Here we discuss the differences in the ways in which these two classes of brokerages transact orders. But if you'd like to learn more about the different types of brokerages, take a look at this broker tutorial.

Full Service Broker
In the past, this was the main method for investors to enter into the securities market. Investors would simply contact their full service brokers and have them purchase different stocks and bonds, so doing transactions with full service brokers is quite straightforward. Also, full service brokers will typically call you and give you recommendations for buying or selling particular securities.

Today, these brokers are not quite as popular; however, with so many different investment products available, almost all full service brokers are able to transact stocks, bonds and mutual funds.

Discount Broker
Discount brokerages have been increasing in popularity with their ever decreasing commission fees. These brokerages, like large supermarkets, provide you with almost everything you need at a relatively cheap price, but you will have to do most of the work by yourself. At almost all discount brokerages you can buy stocks, bonds or mutual funds either by calling one of the investment representatives or by transacting these securities yourself on the Internet.

The commission for calling in to a discount broker will cost more than completing the transaction on the Internet, but the motions are all pretty much the same. First, you have to enter an order ticket. Don't be intimidated - the order ticket merely states the type of security you want to purchase (whether it is a bond, stock or mutual fund), the price you want to buy it for, the quantity you would like to buy and the duration for which you want to leave the order valid (e.g. one day to one month). The order ticket must be completed, whether by yourself on your computer or by your broker while getting your instructions over the telephone. After everything is filled out completely and hopefully correctly, 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 the broker; albeit transacting directly does have advantages, but with this method, you should consider a few things:

First, are you comfortable with holding the securities yourself? When you buy stocks and bonds directly from the issuer, they will be held in certificates, either in bearer form or registered form, which means 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. If you lose a security in registered form you must, to be issued a new certificate, undertake the process of contacting the issuing company. This problem or concern, however, doesn't arise with mutual funds because you don't actually hold units individually.

Second, do you need access to the funds immediately? When you are selling mutual funds, you usually have to wait three days after the transaction date before you can receive any cash. This is irrespective of whether you bought them with a brokerage or with the actual issuing firm. The wait for stocks and bonds, however, can be significantly longer. If you want to sell instruments that are in registered form, you have to sign the back of each certificate and then send them to the issuing company before you can receive any cash. Obviously there's always some concern about whether the certificates will get there in a timely and complete manner.

Third, how important is the price of purchase or sale to you? If you are a penny pincher and like to buy stocks, bonds and mutual funds for the cheapest possible market price, dealing directly with the business may not be suitable for you. Freedom to choose a transacting price becomes limited when you buy directly from the company. When you buy stocks and 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.

After taking the above into account, here are some advantages to buying and selling direct. Businesses typically have few restrictions on the minimum number of units being purchased. Some brokerages require minimum initial mutual fund purchases of $1000 whereas, if you buy directly from the issuer, the minimum can go down to $500 or less. Additionally, you don't need to have an account, which sometimes require a minimum balance and penalizes long term investors with inactivity fees.

Banks
Although most banks don't sell you stocks, they do offer mutual funds and bonds, but their selection will be limited to funds offered by the bank itself or through it's partners. Banks also provide for a convenient location to buy bonds and mutual funds: you can simply walk to just about any corner bank and purchase these investments on the spot.

When you do go into a bank, the representative helping you should be able to tell you the different characteristics and minimum purchase amounts of the products that are available for purchase, whether a CD, bond or mutual fund.

Person to Person
Theoretically, you can buy and sell securities individually (outside of an exchange): say a friend of yours has a stock that you would like to buy, or a relative who needs the funds immediately would like to sell you a bond. This method of transacting securities, however, is not common and poses a significant risk; you must trust the person with whom you are dealing and make sure you are not being scammed--for instance, you could be sold a false, laser-copied certificate.

If you are decided upon doing this type of transaction, you will, for most stocks and bonds, have only to sign the back of the certificates, and then they can be sold to another party. If you are trying to buy them, the other party will have to sign them over to you. 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.

Conclusion
We hope this has helped give you a good idea of the different forms of buying and selling securities. Whether you decide to deal with a full service or discount broker, issuing company, bank or a friend/relative, there are many options out there. Just make sure that you've done your homework to find out which route is best for you.

by Investopedia Staff, (Contact Author | Biography)

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