Final answer:
A customer's instruction to buy General Motors stock when the price is right grants the broker discretion on the trade and involves purchasing stock on the secondary market, where the issuing company doesn't benefit financially. Stock ownership equates to a share of the company's equity. Financial strategies involving leverage can amplify both gains and losses.
Step-by-step explanation:
When a customer instructs their registered representative to buy 100 shares of General Motors whenever the representative thinks the price is right, they are issuing a discretionary order. This means the broker has the discretion to execute the transaction at a price they consider appropriate. It's important to understand that once the General Motors stock is purchased from another investor on the secondary market, the company General Motors does not receive any financial benefit from this transaction. The secondary market operates like the housing market in that respect; just as buying a house means paying the current owner rather than the builder, buying stock means acquiring ownership from an existing shareholder rather than contributing capital to the company itself.
Stock ownership represents a slice of the firm's ownership, whether it's a smaller company or corporate giants like IBM, AT&T, or Microsoft. In these large firms, numerous shareholders each hold a portion of the company's ownership through shares. Buying shares of General Motors means the investor is now one of those many owners. Complex financial maneuvers like using leverage and margin could lead to substantial gains, but also significant risks, as shown by the example of buying additional shares of General Electric using existing stock as collateral. This illustrates the potential volatility and risk inherent in stock investments.