Rules on Buying Shares of Stocks

by Dennis Hartman

When you buy shares of stock, you take on partial ownership of a company. You will gain or lose value on your investment as the fortunes of that business change. This makes it important to select stocks that have potential for growth. However, an investor must also navigate the regulations that govern stock sales.

How to Buy Stock

You can purchase shares through a stockbroker or, in some cases, directly from the company that issues the stock. Most large corporations list their stocks on major exchanges, which allow only members with seats on the exchange to actually buy and sell shares. Each stock exchange has its own rules for membership, along with policies for deciding which businesses can list shares. To buy stock in a company listed on an exchange, you'll need to go through a licensed stockbroker with access to someone who has a seat on the exchange.

Broker Policies

Many rules that affect individual investors deal with brokers' policies and fees. For example, brokers can't process purchase orders instantaneously. Instead they provide time frames during which they will buy shares after receiving your request. This window might affect the price you pay per share. Likewise, brokers charge commissions on purchases. Some online stockbrokers offer free purchases for a limited period, or fixed rates on orders of less than a certain value.

Tax Laws

U.S. laws in the tax code also affect stock purchases. When you buy stock, you have the option of writing off your investment expenses to offset investment income you gain from selling stock, or other taxable investments, in the same tax year. Eligible investment expenses include the interest you pay to borrow money to buy shares of stock, payments for investment advice or stock research, and expenses related to communicating with and traveling to your broker. If you plan to deduct investment expenses from your cost of buying shares, you'll need to document those expenses and to keep receipts as proof.

Insider Trading

Even if you work with a licensed broker, accept the broker's policies and comply with tax law, you might not be able to buy shares of stock legally. Insider-trading laws forbid purchasing stock if you have information about the investment that isn't available to the general public. This doesn't necessarily mean that you can't buy shares in a company that you work for, or that someone close to you works for. However, if you learn about upcoming product releases, financial reports or mergers before the stock-buying public does, buying shares might subject you to criminal charges.

Photo Credits

  • Comstock/Comstock/Getty Images