FOOL SCHOOL
How Do You Buy Shares?

January 30, 2002

To buy a share you need a broker. Brokers come in all shapes and sizes. We think that online brokers offer the best value for money and you can find out all about them, and how to use them, in our Broker centre.

So what happens when you instruct your broker to buy or sell some shares? Well, they scribble down your order and go off to speak to someone known as a market maker. Of course these days this is all done electronically. A market maker is someone who holds a handful of shares and it is their job to ensure that you and I are always able to buy and sell shares. They make the market, hence the name. In order to do this they will quote a price at which they will buy from you and sell shares to you. The difference between the two prices represents their profit.

The price at which you can buy shares is called the offer price. The price at which you can sell shares is called the bid price. Naturally the offer price is the higher of the two otherwise the market maker would never make any money. The difference between the bid and offer prices is called the spread.

The smaller the company's market value the larger the spread is likely to be. This is because with smaller companies, fewer shares are traded so a market maker needs to make a larger profit on each share to cover their basic costs. Whenever you see a share price quoted, it is usually the mid-price.

On our quote system you will see all three prices displayed as this quote for Vodafone demonstrates. However, these are only indications. Your broker may be able to get a better price for you than is indicated. In fact that is their job. They are obliged to get the best price they can for you. That's why you pay them commission.

Once the broker and market maker have agreed on a price the trade will be recorded. You will then receive a contract note confirming the order. The money changes changes hands a few days later. As of February 2001, the standard settlement period is now three days.

To acknowledge your ownership of a share you used to be sent a paper share certificate. However, these days most brokers offer what is known as a nominee service, meaning that your holdings are pooled with all its other customers in order to cut costs and make trading quicker and easier.

In the next article we will look at the question "how much do you need to invest in shares?"

Where Next?
Get A Broker 
More on Market Makers