Lets say you hear a tip that X company is coming out with a brand new product that is supposed to double their business. You think to yourself, "I wish I owned that company!" Well you can!
X company, along with other companies, lets the public buy part of its company. It does this through selling shares. A share or stock is simply a piece of paper that says you own part of a company.
This part is usually extremely small, perhaps thousandths of a percent of the total company, but, hey, it is a beginning!
You decide you want to buy part of X. You count up all of your money and find out that you have Y amount.
Well you are not going to be able to buy the whole company ...
But it is a start!
You've got the money, you know what stock you want to buy, now what? Do you go to the grocery store and ask for a dozen shares of X? Not exactly, but close. You don't go to a grocery store, but rather you call a stockbroker.
A brokerage house is your supermarket of stocks! You call up a stockbroker and tell him that you have the Y amount and want to buy as much of X as you can.
The stockbroker in return tells you the listed price of X and that for your Y amount you can buy 50 shares of the X company. You then give to the stockbroker the money, and you get the shares.
Bingo! You have just bought stock in a company!
Sounds simple enough, right?
Actually it is not if you look at it from the stockbroker's point of view.
When you told the stockbroker you wanted those 50 shares of the X company, he did not magically buy them for you. Rather, he sent a message to the Stock Exchange to buy these shares for you.
Now this message is entered in the process and it buys your the 50 shares.
Then a report is issued back at the brokerage house that bought the shares. The stockbroker keeps a record that you own that stock, rather than sending you the actual paper stock certificates.
If you ever want to sell them, your stockbroker will sell them, deduct his commission, and then give you the money.