Where do all the shares go when you sell them?

[Penn42]

I've been wondering what the actual logistics of buying/selling is for some time.  I know I can sell or buy shares whenever I like.  When I do that am I instantly paired with someone or multiple someones who happened to be doing the opposite transaction at that given time?  Is there that much trading going on that there's never a shortage of shares to be bought or sold because there's always another buyer/seller available or is there some share "warehouse" that you buy from or sell to?

Also, after the initial influx of cash once a company goes public, where is the ongoing benefit for the company?  Do public companies get some portion of transaction costs? 

These questions seem almost stupid to me, but after all the reading I've done here and on Bogleheads - and the 7 books I've read on investing so far - I haven't come across any information in regards to these questions.  Perhaps I'm missing something obvious and super fundamental about the whole process...

[Paul der Krake]

I've been wondering what the actual logistics of buying/selling is for some time.  I know I can sell or buy shares whenever I like.  When I do that am I instantly paired with someone or multiple someones who happened to be doing the opposite transaction at that given time?  Is there that much trading going on that there's never a shortage of shares to be bought or sold because there's always another buyer/seller available or is there some share "warehouse" that you buy from or sell to?

Yes, there really is a lot of trading for most securities, the number of shares that change hands during a single day is called "volume", which is often showed on price trackers alongside other commonly used metrics. There are also market makers who basically promise to buy and sell all the time, providing liquidity. In practice, brokers have systems that record who owns what, no physical stock certificates are exchanged.

Also, after the initial influx of cash once a company goes public, where is the ongoing benefit for the company?  Do public companies get some portion of transaction costs? 

No. The company may benefit indirectly from having a large liquid pool of its own shares and the obligations that come with being a public company, but funding only occurs when stock is issued (minus the underwriting banks' fees).

[lemanfan]

When you're in smaller markets (e.g. some smaller stock markets in Sweden where I sometimes trade as a Swede) there are stocks with so little trading that it can take hours or days to fill an order, since there are very few people buying and selling.  This also means that the prices can fluctuate widely.

Once a company is publicly traded, it has a number of advantages and some disadvantages of being on a stock market - but unless they do a "secondary stock offering" where more new stocks are created and sold just like in an IPO, they do not directly get more money. 

Advantages of being on the stock market includes:

• Free publicity
• Easier for people to buy and sell shares (including employees and directors)
• Usually a higher value in terms of e.g. value per revenue or per earning, meaning that they can use their own stock as "currency" when they purchase other companies

[Michael in ABQ]

For every buyer there must be a seller and vice versa. Typically shares might trade in blocks of 100, 500, etc. When you want to sell 27 shares there might be someone who wants to buy 100 shares. A market maker is someone who might be willing to buy those smaller blocks of shares in order to turn around and fulfill the larger order. They take a small spread and if they do it right make a small amount on each share. This is where high frequency trading comes into play. A computer will basically find those tiny little inefficiencies and make a penny here and a penny there on millions of shares trading everyday. Or they'll see that you placed an order to buy 100 shares of XYZ at $57.25. In that split second before your trade is executed they'll buy it at $57.24 and then turn around and sell it to you at $57.25. Or they'll buy it at $57.25 thus forcing you to buy it at $57.26 or $57.27 because at that exact moment there's no other selling willing to sell 100 shares at $57.25.


I'm not sure what level of access you need but there is a way to basically sell all of the open orders. You might have a stock trading at $10.00 but having lots of buyers willing to purchase at $9.98 or $9.95 and lots of sellers willing to sell at $10.02 or $10.10. The reason the price moves is somebody capitulates and decides they want to buy at $10.02 or is willing to sell at $9.98. Then the price of the stock moves. With heavily traded stocks the volume can be millions or tens of millions of shares everyday, effectively people are buying and selling every second. With some smaller companies there might only be a few tens of trades every day and so the price will only move every 5-10 minutes.

[K-ice]

Fascinating. Good question.

I've also felt like I don't fully understand Limit Price etc.

Here is my brokers explanation:

For stock, options and short selling orders, the price choices are:

Market price - select market

A market price order is an order to buy or sell at the best available current price. A market order is typically executed immediately provided there are buyers you can sell to or sellers you can buy from in the market. 
Please note that if you choose to enter a market-price order outside regular trading hours, the opening price of the stock may not reflect its closing price.

Limit price - enter a price in the Limit Price field

A limit price order is an order to buy or sell a stock at a specific price. The order can be executed only at the specified price or better. A limit order sets the maximum price the client is willing to pay as a buyer, and the minimum price they are willing to accept as a seller.

Stop Price - either a stop limit or stop order

Stop limit - Requires a Stop Price (or trigger) and a Limit Price

For sell orders (stop loss order) - a stop price and a lower limit price. The Limit Price must be equal to or less than the Stop Price entered.
For buy orders (stop buy order) - a stop price and an upper limit price. The Limit Price must be equal to or greater than the Stop Price entered.
Note that the stop price can be the same as the limit price.

Stop order - Requires only a Stop Price. A Stop order becomes a market order when:

For sell orders (stop loss order) - the price of the stock declines to or below the stop price.
For buy orders (stop buy order), the price of the stock rises to or above the stop price.

Arggg still not clear.

So if I stock's market price is $6.00 can I put in a limit of price of $5.90 in the hopes of buying them on "sale"?

Or if it is $6.00 can I set $6.10 just to be sure my trade is executed even if there slight jump for some reason?

[MDM]

A market price order is an order to buy or sell at the best available current price. A market order is typically executed immediately provided there are buyers you can sell to or sellers you can buy from in the market. 

A limit price order is an order to buy or sell a stock at a specific price. The order can be executed only at the specified price or better. A limit order sets the maximum price the client is willing to pay as a buyer, and the minimum price they are willing to accept as a seller.

So if I stock's market price is $6.00 can I put in a limit of price of $5.90 in the hopes of buying them on "sale"?

Yes.

Or if it is $6.00 can I set $6.10 just to be sure my trade is executed even if there slight jump for some reason?

No need to do this - a market price order will suffice.  Do you see why?

[seattlecyclone]

Right on both counts.

If you put in a limit order at $5.90 you're telling the computer to buy you some of that stock if and only if someone is willing to sell for $5.90 or less. In contrast to a market order there's no guarantee that your trade will happen at all.

Your $6.10 example can be a good strategy in many cases. It doesn't actually ensure your trade will execute. Like any limit order, it's possible it won't execute if the market price stays on the wrong side of your limit. Instead you would do this to protect yourself in case the market price jumps above $6.10 while you're placing your order. You'd have a chance to reevaluate your decision if that happens.

[BicycleB]

I've been wondering what the actual logistics of buying/selling is for some time.  I know I can sell or buy shares whenever I like. When I do that am I instantly paired with someone or multiple someones who happened to be doing the opposite transaction at that given time?  Is there that much trading going on that there's never a shortage of shares to be bought or sold because there's always another buyer/seller available or is there some share "warehouse" that you buy from or sell to?

The bolded part gets at a key point. As the Swedish poster showed by example, you don't actually get to instantly buy or sell shares unless someone takes the other side of the transaction.

All of the following are my understanding, but if it's misunderstanding, will accept correction from wiser heads. Speaking generally, one way of solving the problem is for an intermediary to serve as a "market maker". This entity (company, or in theory, person) buys when you sell, then sells to the other person.

The market maker usually accepts your sell order, then waits for a buy order that can be matched with it, then does both transactions because that way they experience no risk. Alternatively, they could fill your order and become the actual owner of the shares. The second way allows them to fill your order faster, which would help in the Swedish case, but then they would lose money if they never get a buyer at a good price; by filling your order, they accidentally became a market speculator, so to speak. Perhaps in a situation of high volume, a small bit of this own-the-stock type of market making would let them fill orders of different sizes without much risk though.

Here's Investopedia's description:
https://www.investopedia.com/terms/m/marketmaker.asp

[nereo]

Good discussion - adding one thing that I didn't see mentioned re:

Also, after the initial influx of cash once a company goes public, where is the ongoing benefit for the company?

A publicly traded company can raise capitol in a hurry by issuing new stock.  This 'dilutes' the share price causing it to go down (generally a bad thing) but it moderation it can allow a company to do things like purchase equipment or entice/reward board members with additional compensation.

A publicly traded company also has the opposite option - buying back stock. If they have a great quarter or a new tax law gives them a windfall (ahem) they can either plow that money back into the company (in the form of buying new equipment or giving raises) or they can buy back shares, which will cause the share price to rise. If the company feels it is currently undervalued this is a way to invest in the business at a discount.

[Penn42]

I'm glad to find out that a transaction cannot take place unless there's complimentary party making the opposite transaction.  That is nice and simple.  All the fine details of market makers can get much more detailed it would seem from the investopedia link, but if the long and short of it is there are firms that facilitate the transaction between two parties that makes sense.

The world of limits seems to be adjacent to stock options but without the buy-in, correct?  I'm not particularly interested in using either of those things right now, but are limits/options are also available for mutual/index funds?

[geekette]

Fascinating. Good question.

I've also felt like I don't fully understand Limit Price etc.

Here is my brokers explanation:

For stock, options and short selling orders, the price choices are:

Market price - select market

A market price order is an order to buy or sell at the best available current price. A market order is typically executed immediately provided there are buyers you can sell to or sellers you can buy from in the market. 
Please note that if you choose to enter a market-price order outside regular trading hours, the opening price of the stock may not reflect its closing price.

Limit price - enter a price in the Limit Price field

A limit price order is an order to buy or sell a stock at a specific price. The order can be executed only at the specified price or better. A limit order sets the maximum price the client is willing to pay as a buyer, and the minimum price they are willing to accept as a seller.

Stop Price - either a stop limit or stop order

Stop limit - Requires a Stop Price (or trigger) and a Limit Price

For sell orders (stop loss order) - a stop price and a lower limit price. The Limit Price must be equal to or less than the Stop Price entered.
For buy orders (stop buy order) - a stop price and an upper limit price. The Limit Price must be equal to or greater than the Stop Price entered.
Note that the stop price can be the same as the limit price.

Stop order - Requires only a Stop Price. A Stop order becomes a market order when:

For sell orders (stop loss order) - the price of the stock declines to or below the stop price.
For buy orders (stop buy order), the price of the stock rises to or above the stop price.

Arggg still not clear.

So if I stock's market price is $6.00 can I put in a limit of price of $5.90 in the hopes of buying them on "sale"?

Or if it is $6.00 can I set $6.10 just to be sure my trade is executed even if there slight jump for some reason?

If you're buying and you put in a market order, it goes for whatever comes up available, and it may jump up before you get it.  With a market order, I doubt you'd get it for a lower price since I'm pretty sure the broker will enjoy the difference.   You certainly can set a limit price for lower than the current quote, usually for either the same day, or a time span (60 days?)  It may or may not execute. 

Since my experience is only selling individual stocks (company stock purchase plan), when we're ready to sell, I'll generally pick a price slightly higher than current, and set it for 60 days and usually it'll sell.  If it's dropping and you have to sell for some reason... market price and cross your fingers, I guess.

Someone will come along and correct me, I'm sure...

[Freedomin5]

I'm glad to find out that a transaction cannot take place unless there's complimentary party making the opposite transaction.  That is nice and simple.  All the fine details of market makers can get much more detailed it would seem from the investopedia link, but if the long and short of it is there are firms that facilitate the transaction between two parties that makes sense.

The world of limits seems to be adjacent to stock options but without the buy-in, correct?  I'm not particularly interested in using either of those things right now, but are limits/options are also available for mutual/index funds?

I’m not an expert, so please correct if my understanding is wrong, but I thought I should always use Limit orders to ensure that I’m getting a stock at the price I want. With market orders, I’m saying “buy X number of shares at whatever cost” and I could be in for a nasty surprise if share prices jump up unexpectedly. With Limit orders, I’m saying, “Only buy at this particular price (the limit price)” so if the order fills, I know exactly how much it’ll cost.

Same when selling. Sell at “market price” means “sell even if the prices tumble, I don’t care, just get rid of my stocks”. Sell at Limit price means “only sell if the stock is at this price or better (higher) which means “make me at least this amount of money or more. If the price is less then I don’t want to sell,”

Is that generally correct?

[seattlecyclone]

Yes, you're exactly right. You can name your price or be sure you'll trade, but not both.

[MDM]

I’m not an expert, so please correct if my understanding is wrong, but I thought I should always use Limit orders to ensure that I’m getting a stock at the price I want. With market orders, I’m saying “buy X number of shares at whatever cost” and I could be in for a nasty surprise if share prices jump up unexpectedly. With Limit orders, I’m saying, “Only buy at this particular price (the limit price)” so if the order fills, I know exactly how much it’ll cost.

Same when selling. Sell at “market price” means “sell even if the prices tumble, I don’t care, just get rid of my stocks”. Sell at Limit price means “only sell if the stock is at this price or better (higher) which means “make me at least this amount of money or more. If the price is less then I don’t want to sell,”

Is that generally correct?

Yes, that is a good analysis.

In theory, large price changes can occur at any time.  In practice, that is more likely to happen between market close and market reopen, so the use of limit orders is particularly recommended then.  And, if one wants to have a little fun, one can try to "save" or "earn" a few pennies per share by placing limit orders "close to" the current market price during the day.  It's a cheap thrill, and I've done it, but in the grand scheme of things it won't make much difference for a long term buy and hold investor.

[FiveSigmas]

Good discussion - adding one thing that I didn't see mentioned re:

Also, after the initial influx of cash once a company goes public, where is the ongoing benefit for the company?

IANAMBA* but here's my naïve take:

A company (or rather a company's management) cares about the share price because that's its job.

To put it less glibly: Under most company charters, shareholders own the company, and the management of said company (from the CEO on down) is there to serve them. A CEO is hired by the board (aka the shareholder's elected representatives) and is incentivized with performance bonuses, and ultimately, with threat of termination. The CEO has a very real desire, then, to see that the share price rises (or that shareholders receive increased income via dividends/buybacks). This motivation (ideally) propagates down the chain of command: employees are rewarded/penalized according to how well they serve the goals laid out by their managers.

This is more than just theoretical. Activist shareholders (e.g. Carl Icahn) can and do make substantial investments in companies with the express purpose of overthrowing management when they believe it can be run more efficiently. If you own an individual share of a company, you may wield essentially no direct power, but the voting rights (combined with the rights to future dividend streams) still give that share value.

* I am not an MBA.

[marty998]

I’m not an expert, so please correct if my understanding is wrong, but I thought I should always use Limit orders to ensure that I’m getting a stock at the price I want. With market orders, I’m saying “buy X number of shares at whatever cost” and I could be in for a nasty surprise if share prices jump up unexpectedly. With Limit orders, I’m saying, “Only buy at this particular price (the limit price)” so if the order fills, I know exactly how much it’ll cost.

Same when selling. Sell at “market price” means “sell even if the prices tumble, I don’t care, just get rid of my stocks”. Sell at Limit price means “only sell if the stock is at this price or better (higher) which means “make me at least this amount of money or more. If the price is less then I don’t want to sell,”

Is that generally correct?

Yes, that is a good analysis.

In theory, large price changes can occur at any time.  In practice, that is more likely to happen between market close and market reopen, so the use of limit orders is particularly recommended then.  And, if one wants to have a little fun, one can try to "save" or "earn" a few pennies per share by placing limit orders "close to" the current market price during the day.  It's a cheap thrill, and I've done it, but in the grand scheme of things it won't make much difference for a long term buy and hold investor.

Yes... I never put an order in "at market". It's because those fucking HFT bots will front run me and bid up the price as alluded to up this thread, resulting in me paying more and them making a profit off my intentions.

Lousy thieving vampires should be banned, but we all know regulators are not there to protect the retail investors. The stockmarket operators make far too much money off HFT outfits to do anything about it.

/end rant.

[MustacheAndaHalf]

Most companies issue bonds rather than sell new shares to raise money.  To make a metaphor of an individual out of it, say you can take out a mortgage or you can sell stock you own.  If you sell stock, you pay tax on the sale - so does the corporation that issues new stock.  If you take out a mortgage, you keep ownership of what you have and can deduct mortgage payments.  Corporate bonds work the same way - the company deducts the interest it pays.

[FiveSigmas]

Most companies issue bonds rather than sell new shares to raise money.  To make a metaphor of an individual out of it, say you can take out a mortgage or you can sell stock you own.  If you sell stock, you pay tax on the sale - so does the corporation that issues new stock.  If you take out a mortgage, you keep ownership of what you have and can deduct mortgage payments.  Corporate bonds work the same way - the company deducts the interest it pays.

That said, stock dilution happens all the time, doesn't it? For instance, my understanding is that employee stock options and stock purchase plans are often funded with shares "made from thin air". Shareholders accept the decrease in the value of their shares because, hey, employees have to be rewarded somehow, right? You either pay them more -- decreasing net profits -- or you give them ownership rights.

[bwall]

Most companies issue bonds rather than sell new shares to raise money.  To make a metaphor of an individual out of it, say you can take out a mortgage or you can sell stock you own.  If you sell stock, you pay tax on the sale - so does the corporation that issues new stock.  If you take out a mortgage, you keep ownership of what you have and can deduct mortgage payments.  Corporate bonds work the same way - the company deducts the interest it pays.

I thought that with a new stock issuance the new funds would be marked as 'paid-in capital', as opposed to 'income', and thus not be subject to taxation. Can someone confirm if this is correct?

[BicycleB]

Most companies issue bonds rather than sell new shares to raise money.  To make a metaphor of an individual out of it, say you can take out a mortgage or you can sell stock you own.  If you sell stock, you pay tax on the sale - so does the corporation that issues new stock.  If you take out a mortgage, you keep ownership of what you have and can deduct mortgage payments.  Corporate bonds work the same way - the company deducts the interest it pays.

I thought that with a new stock issuance the new funds would be marked as 'paid-in capital', as opposed to 'income', and thus not be subject to taxation. Can someone confirm if this is correct?

Pretty sure that's correct. Creation of stock is a financing activity. Capital gains tax would only apply to sale of previously created stock.

I guess the question depends whether issuing a stock is separate from selling the newly issued stock. If so, whether the company makes a taxable profit on the sale depends on whether the sale price is higher than the issuance price, but the issuance itself would not cause any tax liability.

Will still defer to a more definitive answer...

***

@FiveSigmas, great answer re the benefit of a company's share price!

[COEE]

Interesting discussion.  Posting to follow.

I worked for a startup where I was issued stock options.  Yes, the owners can issue new stock and dilute your shares at any time, but this typically happens when a new buyer is wanting to invest in the company.  Perhaps a new investor wants to buy 20% of the business.  So more stock will be issued so that the new investor owns 20% of the business - diluting everyone else's share.  Many times this will spur legacy investors to buy more shares so that they aren't diluted and they maintain their majority shares.

It's important to know your number of shares vs outstanding shares so that you know your possible percent ownership in the company.  This will change over time.  If you work for a good company, they will give you more options as time progresses so that your options don't dilute much... a crappy company (read: greedy owners) will not issue you more options as time progresses, and your percentage stake in the company dilutes to essentially nothing.

It was terribly interesting working for a startup where I learned about how some of this stuff works in practice.  Unfortunately we never had a pay day and the company went tits-up.  My options were never worth anything and I had the option to own about 0.1% of the company when I joined.

[Financial.Velociraptor]

Not sure if anyone has mentioned it yet but when you buy/sell a mutual fund or ETF/ETN, the shares are either created or destroyed.  There is no counterparty.  Your transaction takes place at the current quoted NAV and buys become an increase in the fund's capital under management or if you sell a decrease thereof. 

[FiveSigmas]

Not sure if anyone has mentioned it yet but when you buy/sell a mutual fund or ETF/ETN, the shares are either created or destroyed.  There is no counterparty.  Your transaction takes place at the current quoted NAV and buys become an increase in the fund's capital under management or if you sell a decrease thereof.

Good point about mutual funds. I have to admit that I didn't know the exact details of ETFs, but is this strictly true of ETFs?

From the SEC (https://www.investor.gov/introduction-investing/basics/investment-products/exchange-traded-funds-etfs):

Unlike with mutual fund shares, retail investors can only purchase and sell ETF shares in market transactions.  That is, unlike mutual funds, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, retail investors.  Instead, ETF sponsors enter into contractual relationships with one or more financial institutions known as “Authorized Participants.”  Authorized Participants typically are large broker-dealers.  Only Authorized Participants are permitted to purchase and redeem shares directly from the ETF, and they can do so only in large aggregations or blocks (e.g., 50,000 ETF shares) commonly called “Creation Units.”

It sounds like ETFs are more of a hybrid. When small-time investors like you or I trade ETFs, we really are trading amongst ourselves -- shares don't spring from nowhere. On the other hand, Authorized Participants can, at regular intervals, spin up or spin down Creation Units out of thin air.

Another fun-fact I didn't know, but which makes sense now that I've thought about it: Creation Units are exchanged in-kind. That is, when an Authorized Participant "buys" Creation Units, that institution must first acquire the underlying securities (i.e. the individual stocks, futures contracts, etc... that make up the ETF) and then trade those securities for shares in the ETF.