Selling a stock is a common step in any investor’s journey, but the mechanics of it can seem confusing if you're unfamiliar with how the process works. When you click “sell” on your brokerage platform, a series of actions are triggered behind the scenes. These steps involve clearinghouses, settlements, and potential financial impacts such as taxes or capital gains.
Think of this article as your “what happens when you sell a stock for beginners” guide. We'll walk you through the process from the moment you place a sell order to where the money goes once the sale is complete. We'll also cover key issues like how long it takes to receive your funds and any tax implications to consider, with insights from financial experts.
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What happens when you sell a stock: The step-by-step process
The quick answer to “what happens when you sell stock?” is straightforward: You essentially transfer ownership of that asset to another investor in exchange for cash.
But this isn’t just a simple swap—there are several key stages involved. “When you place your sell order, it goes into that virtual line where everything seems to be about timing and price dynamics,” says Adam Garcia, financial consultant and founder of The Stock Dork, a resource for investors. Here’s a look at how those dynamics influence each step of the process.
This “virtual line” refers to the queue of orders in the stock market waiting to be executed. When you place a sell order, it gets added to this order queue, where your stock sale is prioritized based on factors like timing, price, and order type.
- Place a sell order: Whether you're using an online brokerage platform or working with a financial advisor, the first step is placing a sell order. You can choose to sell your stock at the current market price or set a specific price (limit order) at which you'd like the sale to occur.
- Match buyers and sellers: Once the order is placed, the brokerage will match you with a buyer. If you're selling a popular stock during trading hours, this happens almost instantly. But if you're selling a lesser-known stock or the market is closed, it could take longer.
What happens when you sell a stock and no one buys it? If no one is willing to purchase the stock at the price you're asking, your sell order remains open (or pending) until a match is found. You have the option to wait, adjust your selling price, or cancel the order altogether. - Execute the trade: After a buyer is found, the trade is executed, meaning ownership of the stock transfers from your account to theirs. The exact price you sell for can fluctuate if you choose a market order—a type of stock order used to buy or sell shares immediately at the best available current price—since stock prices can change rapidly.
- Settlement period: Even though the trade is technically completed, the money and stock don’t immediately change hands. There is a settlement period, typically two business days (referred to as T+2), during which the transaction is finalized.
- Funds deposited: “The immediate cash from the sale of stocks doesn’t go directly into your bank account; they get credited into your brokerage account out of which money can be withdrawn or reinvested,” Garcia says. “This step shows how, between you and your money, various middlemen and financial institutions work to process and validate the transactions before the funds finally reach your pocket.”
Stock sale: Key aspects
While the act of selling may seem as simple as clicking a button, understanding the steps behind the scenes can make you a smarter investor.
Timing: How long after you sell a stock do you get the money?
The settlement period is the key factor determining when you receive the money after selling a stock. The industry standard is T+2, meaning you’ll have access to your funds two business days after the transaction date.
For example, if you sell stock on a Monday, your funds should be available by Wednesday. If you sell on a Friday, you’ll likely receive the money by the following Tuesday due to the weekend.
Some brokerages may offer instant access to a portion of the funds while the transaction settles, but this varies depending on your platform and account status.
Earnings: What happens to the money when you sell a stock?
Once the sale is settled, you might wonder, “Where does money go after selling stock?” It typically goes into your brokerage account. You can leave the funds there and invest them in other securities or withdraw them to your bank account.
There are usually no restrictions on how you can use this money once it's in your brokerage account. However, if you're thinking about reinvesting, you may want to consider the “wash-sale rule,” which can impact your taxes if you sell and rebuy the same stock within a short period.
The wash-sale rule prevents investors from claiming a tax deduction on a capital loss if they repurchase the same or a “substantially identical” stock within 30 days before or after selling it. This rule is designed to discourage investors from selling a stock just to claim a tax benefit, only to quickly buy it back.
Beneficiary: Who gets the money when a stock is sold?
When you sell a stock, where does the money go? It goes to you, the seller. You receive the proceeds from the sale. However, there may be some deductions before the money hits your account, including:
- Brokerage fees: Depending on your brokerage service, there may be fees or commissions taken from the sale.
- Taxes: If you’re selling for a profit, a portion of your earnings may be owed in capital gains taxes, which we’ll cover more in the next section.
Ownership: Do you sell the entire stock or just profit?
“The catch with the selling of shares is that you sell the whole share and not the profit from it,” Garcia says. Unless you specify otherwise, you are not just selling the “profit” but your whole ownership, whether you gained or lost on that investment.
If you only want to sell part of your shares, you can do so by specifying the number of shares you’d like to sell. This way, you can retain some of the stock if you believe it will continue to grow in value but want to cash out part of your gains.
“Selling partially has its own strategic importance for maintaining tax requirements and stake in future prospects of the company,” he says.
Tax implications of selling a stock
The IRS views the profit you make from selling stocks as taxable income, but the specific amount you owe depends on factors like how long you’ve held the stock. Here are some tax terms to get familiar with:
- Capital gains tax: If you sell a stock at a higher price than what you originally paid, the difference is considered a capital gain. Capital gains are taxed at different rates depending on how long you’ve held the stock.
- Short-term capital gains: If you hold a stock for less than a year before selling, your profit is considered short-term and is taxed at the same rate as your regular income.
- Long-term capital gains: If you’ve held the stock for over a year, you’ll pay a lower, long-term capital gains tax rate, which ranges from 0% to 20%, depending on your total income.
- Capital losses: If you sell a stock for less than you paid, you incur a capital loss. You can use these losses to offset capital gains and reduce your tax liability.
Example
Robert R. Johnson, PhD, Chartered Financial Analyst (CFA), Chartered Alternative Investment Analyst (CAIA), and Professor of Finance at Creighton University, explains the tax implications with an example:
“Suppose you sell two stocks and realize a $5,000 gain on the sale of one and a loss of $3,000 on the other. You can use that loss to reduce your taxable capital gains, and pay long-term capital gains tax on the net gain of $2,000.
“If, on the other hand, you sold one stock and lost $5,000 and sold another stock at a profit of $3,000, you would pay no capital gains tax and would lower your taxable ordinary income by $2,000.
“If your stock sale losses are larger than your gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income (or $1,500 each for married taxpayers filing separately). Any amount over $3,000 can be carried forward to future tax years to offset income down the road.”
Does selling stock count as income?
Profits (capital gains) made from selling stock counts as income. If you made a profit, you'll owe taxes based on the capital gains tax rules.
However, if you sold at a loss, it can reduce your overall taxable income through capital loss deductions.
Final thoughts: Closing the deal on stock selling
Selling a stock is much more than a simple transaction—it’s a pivotal moment in your financial strategy. From navigating the settlement period to managing your tax liabilities, every detail counts when it comes to maximizing your investment outcomes.
It’s crucial to keep in mind that selling a stock isn’t just about seeing a price jump—it’s about aligning the sale with your long-term goals. Maybe you’re taking your winnings and reinvesting them into new opportunities, or perhaps you’re sitting tight, waiting for the perfect moment to re-enter the market. Regardless, knowing exactly what happens when you sell ensures that each move you make is calculated and purposeful.
It’s an opportunity to reassess, reflect, and reimagine your next move in the world of investing. So, next time you hit that sell button, remember, it’s not just about exiting a position; it’s about positioning yourself for the future.
FAQs
Can you sell a stock at any time?
Yes, as long as the market is open, you can sell your stock at any time. However, there may be after-hours trading for certain stocks.
What happens if I sell a stock at a loss?
Selling at a loss results in a capital loss, which can be used to offset any capital gains and reduce your taxable income.
Where does stock go when you sell it?
When you sell a stock, it’s transferred to another investor. The stock market operates as a marketplace where buyers and sellers exchange shares.
When you place a sell order, your shares are matched with a buyer willing to purchase them. The buyer could be an individual, an institution, or even a fund. Once the trade is executed, the stock ownership transfers from your account to the buyer’s account.
In essence, the stock simply changes hands, allowing another investor to take ownership.
Do I need to report stock sales on my taxes?
When you sell a stock, your brokerage will issue a Form 1099-B, which reports the details of the sale, including the purchase and sale prices. You’ll need this form to report your capital gains or losses on Schedule D of your tax return.
Can I cancel a stock sell order after placing it?
Yes, you can typically cancel a stock sell order if it hasn't been executed yet. If the order is still pending or hasn't matched a buyer, you can withdraw or modify it through your brokerage platform. However, once the trade is executed, it cannot be reversed.
Can I avoid taxes when selling stock?
While you can’t entirely avoid taxes, you can reduce your tax burden through strategies like tax-loss harvesting (selling losing investments to offset gains) or holding onto stocks for over a year to benefit from the lower long-term capital gains tax rate.