If you want to know how selling stocks works then I’m here to explain. As companies go public, companies often encourage its shareholders to sell stock on the open market. So why would companies do this? The reason is that after the IPO of the company, the company needs to raise capital for working capital purposes. Whenever a company is taken public, they have a great surge in demand from investors for their stock. This usually causes a greater increase in share price because of market liquidity and excitement from investors about owning part ownership in that company. In order to meet this demand, public companies need to create a system that allows them to sell off portions of their company without it disrupting their stock price or going below a certain price so they can stay
Selling stocks occurs when you submit to the trading exchange that you’re willing to sell a particular stock for a particular price. Selling stocks has nothing to do with receiving money, the actual consideration is securities (like stock certificates) or an electronic record of your ownership called a “dividend reinvestment plan” (or DRIP.) Instead of receiving cash in exchange for your stocks, the company holds an auction where buyers bid against each other until one person wins the auction.
How Do Stocks Work?
Understanding how stocks works is fairly simple. Companies sell shares of their company to investors, who then sell those shares back to other investors. Owning shares in a company makes the investors part owners of the company. If investors sell shares at higher prices than they bought them, the value is said to go up, and if they sell for less than they paid, the value is said to go down.
Initial Public Offerings
When a company wants to raise money for expansion, it goes public by making an initial public offering (IPO) of common stock. What this means is that they are offering shares of their company’s stock (ownership in the company) to investors.
This is a familiar process if you’ve followed the high-profile IPOs of Facebook (ticker: FB), Twitter (ticker: TWTR) and other tech companies. Typically, the amount of the company that is sold is only a fraction of its total ownership, so the price set for the stock (as determined by open bidding once it goes public) determines the value of the entire company by extension.
Working with an underwriter (a Wall Street bank), the firm tries to guess an appropriate valuation (since that’s what actually goes into the pockets of its executives and private investors) but their valuation is usually off the mark in one direction or the other, sometimes by quite a bit. For example, the day it opened TWTR quickly doubled from its offering price.
How Does the Stock Market Work?
For the stock market to work there must be buyers and sellers. These buyers and sellers trade existing, previously issued shares which are offered by one investor and bought by another. The fact that they are previously existing shares means that most trading on the stock market has no direct impact on the company being traded. The buyer can place a market order to purchase at the current price, or a limit order to purchase if the stock reaches a certain price (which can be lower or higher, depending on the trading strategy). That order is matched up with a seller who has put shares up for sale.
The picture Wall Street likes to paint of an opening bell followed by frantic trading in a huge room full of buyers and sellers is pretty much a historical fiction. Stock trading today is done electronically and the prevailing sound is silence, other than the fans that cool the huge supercomputers used by the exchanges and institutional traders. This is good news for the savvy trader and investor because it means a more efficient and predictable marketplace with much less left to chance and randomness.
What Determines Stock Price?
Once the initial public offering is completed, the stock price can move independently of the actual company’s success; a current example is the sky-high stock price for Tesla (ticker: TSLA), a company that may be years from profitability.
So, what makes stock prices go up or down? The simple answer is, supply and demand. Price changes reflect supply and demand, so when a stock is deemed desirable due to recent success of the company, a strong industry sector, or just plain faddishness and popularity — then its price goes up. If investors are unwilling to buy a stock due to the company faltering, a weak industry sector or the price being simply too high, that lack of demand will cause price to drop. At some point price will move low enough that investors are again willing to buy and the cycle will start all over again. Value investors, like Warren Buffett, specialize in finding unpopular stocks in forgotten industries that still have strong earnings and a solid future, buying them (or buying the entire company, as Buffett often does) and waiting for the price to rise.
How to withdraw money from a brokerage account
When you want to withdraw money from brokerage account, here’s how:
- Log in to your account on your broker’s site.
- Go to the transfers page. Where you find this option depends on the broker you use, but it’s usually on the main navigation bar.
- Choose the amount and the withdrawal method. You can transfer the money to a bank account, wire it, or request a physical check. Most brokers, even the best online brokers that don’t have many fees, do charge fees for wire transfers. This type of transfer is faster than a standard electronic funds transfer.
You can only withdraw cash from your brokerage account. If you want to withdraw more than you have available as cash, you’ll need to sell stocks or other investments first.
Keep in mind that after you sell stocks, you must wait for the trade to settle before you can withdraw money from a brokerage account. This typically takes two business days. After your trade has settled, you can follow the withdrawal process above to get your cash.
One final thing to note is that if you have a margin account, your broker might let you take cash out before your trades settle. However, you could be charged margin interest for the period of time between when you submit the request to withdraw money from a brokerage account and when the settled funds reach your account. Always check with your broker before doing an automated withdrawal to ensure you won’t get hit with interest charges or other fees by jumping the gun.
Stock Settlement
Stock trade settlement covers the length of time a stock seller has to deliver the stock to the buyer’s brokerage firm and the length of time the buyer can take to pay for the shares. The current rule is referred to as T+3 settlement. This means that the stock trade must settle within three business days after the stock trade was executed. If you sell stock, the money for the shares should be in your brokerage firm on the third business day after the trade date. For example, if you sell the stock on Wednesday, the money should be in the account on Monday.
Broker’s Best Effort
The T+3 settlement rule applies to the brokerage firms handling the transaction, and in most cases, the money from sold shares will be in your account on the third day. However, the SEC website notes that a broker cannot deposit the money until it has been received from the brokerage firm of the stock buyer, and delays in the receipt of funds can occur. The SEC makes a point that securities laws don’t mandate a hard deadline when the money must be available to you.
Receiving the Money
Once the proceeds from the sale of stock have been credited to your brokerage account, you must still get the money from the account. You can set up Automated Clearing House — ACH — transfers, which allow you to get the money to a bank account in one to two additional days. The quickest way to get money out of a brokerage account is to have the broker wire the money to your bank account. Wire transfers are a same-day service, but carry costs to move your money.
Plan Ahead
If you need money quickly from the sale of stock, some pre-planning could help expedite the process. Plan your stock sale according to the T+3 settlement. If you need to wire the money out of your brokerage account, contact the broker before the settlement date for instructions and know whom and where to call to initiate the wire. Some brokerage firms allow you to link your brokerage account to an associated bank account, enabling you to write a check to access the proceeds of a stock sale.
Conclusion
Selling stocks is a tough subject to master, and learning the intricacies of the market is not for the faint of heart. One bookstore I worked at used to have a long Formica table on which people could sit with their stock orders. It was made of solid oak, had no books on it, nothing on top except clear flat area about six inches all around. The floor manager would go over the information on every order before it was sent into the pits. He would then hand deliver all of them himself. There were very few rackets being done this way, because people were watching it very carefully.