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Is there a limit to the amount of stocks you can buy in a company, and if so, how is that limit determined?
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How is the price of a share determined?
Use small words please.
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You can only buy as many stocks as are outstanding. You, a common guy, can only buy common stock. That is, stock offered to the general public. Preferred stock is different and can only be bought/sold under special conditions (e.g., you’re someone important, the board approves it).
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The price for a stock is like the price of housing or the price of apples. It’s whatever someone is offering to pay for it and what someone else agrees to pay. The seller’s offer is called the ‘ask’ while the buyer’s offer is called the ‘bid’. If ever the two should meet, then the stock is sold. The last sale price is the price reported on the news, in the paper, online and at the exchanges.
ETA: Outstanding stock is the amount of stock that the company has put up for sale. If you were a business and you wanted to raise capital, you could ‘go public’ and start selling stock to guys like you and me. To do that, you’d have to carve up ownership of the business- say, 49.99%. When a company puts out more than 50%, and a single entity (like a rival) buys it all up, that’s called a hostile takeover.
to add to the answer to 1–the fact that there’s only so much stock out there also creates a second limit on the amount of a stock you can buy–to buy, there has to be a willing seller (for publicly traded stock, stock exchanges do the work of matching buyers and sellers–so you don’t need (generally) to figure out who that seller is)
Usually, this isn’t a problem–for most public companies, there’s a lot of common stock outstanding in the hands of a large number of holders, and most consumer stock purchases are small–but at least in theory, you could be limited to owning (say) 45% of the common stock of a company because the person who owns the remaining shares (Say, a CEO who wants to retain control of the company), doesn’t want to sell them.
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No – other than antitrust laws, laws against insider trading, and other such stuff. That is, there may be reasons why buying a controlling interest in a company might be illegal under certain circumstances for reasons extraneous to their actual purchase, but there is no reason why doing so is in and of itself wrong.
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By the market – i.e., the price at which willing sellers are willing to sell to willing buyers. I’d be happy to buy IBM at 25 cents a share, but nobody’s willing to sell it at that price. The guy with 500 shares of worthless Last Chance Gold Mines would be happy to sell it for $50 a share, but nobody’s willing to pay that for them. Not knowing where IBM is at the moment, let me arbitrarily say that there are buyers and sellers both interested at $280 a share, so it trades at that, moving up and down according as people think they can make more per share or are willing to cut price to sell it. Last Chance, on the other hand, won’t get buyers unless you offer it for 10 cents a share, at which point someone might think it’s a worthwhile gamble.
I was under the impression that once preferred stock was initially sold, it could be publicly traded, and was available for the average person to purchase from time to time, as people choose to sell it.
Also, in a way, the company can choose to adjust its stock price. It just has to modify the number of stocks out there. If there’s a stock at $10 and the company wants it at $5, they do a split. It’s just like breaking a cookie into two. Instead of 3 $10 stocks, you now own 6 $5 stocks. It doesn’t have to be a 1:2 either. It can be just about any ratio, though I doubt any company is going to do a weird 45:37 split or something like that.
So don’t look at the price of a stock as an indicator of how well the company is doing. That number is arbitrary. You have to look at the price x shares, known as the market capitalization (amount of money in the market…get it?), aka market cap. This is usually in the millions and billions for any company that you’ve probably heard of.
Some googling shows that I don’t know what I’m talking about with common vs. preferred. That’s not the right terminology, and I can’t find what is.
While it is generally true that you can buy as much stock as you want in a company, if you intend to purchase more than 5% of the stock, you are obligated to tell some people about it, including the SEC, the stock exchange, and the company itself. However, unless you are a fabulously wealthy person (or in charge of Other People’s Money), it will not be necessary to take out your calculator every time you purchase stocks.
Ok, I think I should have phrased question one a little differently. That is:
- Is there a limit to how much stock a company can sell? How do they pick a number?
About the price, who is doing all the negotiating? I thought people buy stock at whatever price is listed on the stock exchange. What am I missing?
Thanks for all the answers so far. If I ever make more than a million dollars on the stock exchange I’ll buy everyone in this thread a beer. 
The stock exchange is just that…an exchange. Lets say I have 10 shares of GE stock. I can tell my broker, “Sell that stock at whatever price you can get for it”, and then the trader on the exchange will look for the first other trader who wants 10 shares of GE, and sell it to him for the price he’s offering, or I can tell him, “Sell my 10 shares for $15.25 a share”, and then the trader will go down and start saying, “Hey, I’ve got 10 shares of GE for $15.25 a share. Who wants to buy GE for $15.25 a share?”
And it’s the same way for the buyer. The trader can buy the stock for whatever price somebody will sell it for, or refuse to buy it except for a specific price or range of prices.
When you go to yahoo or google, or turn on CNBC and see the stock ticker, the price you see for the stock is the price of the last trade. That can give you an indication of what you can sell or buy the stock for. So, to use the GE example, the last trade was at $15.20. So if I tried to buy GE stock at $13.00, I probably wouldn’t get anybody willing to sell it to me at that price. If I tried to buy GE stock at $17.00, that would probably be foolish of me because I could probably find people willing to sell it for less.
You should know that there are several different types of order you can place. A “market order” is pretty close to what you were imagining. It executes when received for the best current price (from your perspective) that the shares can be bought or sold for. What others have been describing is basically a “limit order” - I ask to buy or sell a particular number of shares at a particular price or better (from my standpoint - <= the price on a buy, >= the price on a sell). The order sits around until it expires or you cancel it if it doesn’t get met. Most brokerages will let you set times on them, the two most popular options being “until the end of the day” or “until cancelled”. Similarly, there is a “stop” or “stop-loss” order which works the other way around - buy or sell when a certain threshold is crossed (>= the price on a buy, <= the price on a sell). These are mostly used with sells to automatically “stop” your losses (or take a certain low level of gains) by bailing at a predetermined point.
If you are buying some shares of, say, Johnson and Johnson, to hold onto for years, the market order may be just fine for you. That stock isn’t expected to have wild swings during the day, and it will make little difference to you whether you get it for $60.51 or $60.48. OTOH, if you are a day trader intending to pick up a bunch of shares of AMD and sell it by the end of the day at a slight profit, the exact prices you are trading it for matter a great deal to you.
The negotiators are called market makers or specialists, and they match up buyers with sellers, post bid/ask prices and facilitate trades. As a small investor trading through a brokerage on a heavily traded company, your trade may not even get to them. Brokerages are allowed to fill orders from their own inventories, and they tend to do so whenever possible.
BTW, Investopedia a good reference site for you to look up stuff or read tutorials:
Let’s say there are 3 buyers and 3 sellers. The buyers want to buy at $5, $6, and $7. The sellers are holding out for $8, $9, and $10. These sets of numbers are called the book. The Bid would be $7. The Ask is $8. These can be found on any stock report, such as Wal-Mart’s. These numbers are all limit orders. They’re all saying basically “buy/sell at a certain price”.
Now here comes a 7th investor. He places a market order to buy. He’s going to get shares for $8, because that’s the cheapest that anyone is offering. If he places a market order to sell, he’ll get $7 for them because that’s the most anyone is offering to pay for the stock. This person is said to have “demanded liquidity”.
There’s no limit. If they plan to do a public offering, they do some research and figure out how much capital is out there that people would be willing to invest in the company.
Let’s say the finance department reports that they could make a public offering and raise $100 million in capital. It’s then up to the company to decide how to make that offering: they could sell 100 million shares for $1 each, or ten million shares for $10 each, or any other combination.
Generally, companies making initial public offerings will want their shares to go public above $10 per share, and so will divide the shares up in a way to make that happen. (Also, if your shares fall below a certain limit for a certain length of time, your company can be delisted from the exchange. This makes trading your shares much more difficult.)
Once a company raises capital by selling shares publicly, they can continue to make subsequent public offerings – shares can be created by the company at whim. Since this increases the number of shares outstanding, the value of all the shares will go down a little. Another way to create more shares is a split, which Chessic described above. A 2:1 split will halve the value of each share, but everyone ends up with twice as many. This can make it easier to trade shares if they get too expensive.
Finally, there are two ways a company can reduce the number of outstanding shares. They can buy shares back from the public (known as a share buyback.) This is the exact opposite of an offering: the company uses its own cash to buy its own shares from people on the exchange. If the company chooses to cancel the shares they buy back, they cease to exist, making the shares more scarce, and slightly increasing the value. Companies that have a lot of cash on hand may do this from time to time to benefit their shareholders.
The other way is a reverse split: the number of shares outstanding is divided in half, and the price of each one is doubled. Like a regular split, this doesn’t have to be 2:1, any ratio can be used. Reverse splits are often used to prevent delisting; if a company is in the shitter and its stock price goes below, say $2, they may do a 5:1 reverse split to get the price above $10. But now everyone has 1/5 the number of shares that they did before, decreasing liquidity.
As to how they pick a number, a company first appears on the market through an IPO - “Initial Public Offering”. I’ll let investopedia describe it:
The company then has a certain number of “shares outstanding” and “float”. The latter is the number of those shares that are not held by insiders and so on, - they are being traded by the general public.
The company CAN issue more shares in further offerings, but it isn’t done lightly. A lot of it is going on right now because companies are issuing new shares to recapitalize following the recession. When this is done the company is said to be getting “diluted”, and the usual result when such a thing is announced is that the stock price tanks as shareholders react to having smaller slices of the pie in the future.
The company may also have convertibles that get converted into common stock, increasing the number of shares.
The company may also reduce the number of shares outstanding through a “buyback”, buying their own shares and taking them off the market. The company may do this to push the price up, or as a use for a large amount of cash on hand, for instance. Depending on the type of company, the shareholders may see this move as positive, or grouse that they should have issued the cash in dividends instead.
But, generally, the number of outstanding shares will stay fixed.
The company may split to adjust the share price, but, in theory that doesn’t change anything. If the split 2 for 1, everybody simply has twice as many shares for half the price. Psychologically, or in terms of having enough shares to assure market liquidity, it may make a difference.