Buying stocks is equally exciting and boring. The exciting part is the prospect of you striking it lucky and getting rich beyond your wildest dreams. The boring part is the incredibly tardy and banal business talk and documents that accompany it. One of these documents is the stock purchase agreement, which is a sort of confirmation, legal-binding document that protects both the purchaser of the stock and the seller, be it an individual, a company or a stockbroker.

So, you might ask, what is a stock purchase agreement? And what are its uses, types and occasions of use? Well, here’s everything you need to know to get up to speed on stock purchase agreements.

For one, stock buying isn’t how it is portrayed in movies and drama serials. What is shown as an easy process, with a person just phoning in and making millions on a deal and then blowing it on fast cars and big houses is actually a pretty technical process, one that involves a lot of background checks, official document signing and whatnot.

Not to mention the tax-checks you have to go through to assure the government that you have been paying taxes, and you intend to pay them even after you earn something from trading stocks or even if you lose money on top of it. 

Realistically speaking, the depiction and the actual process are poles apart. Just take one aspect of buying and trading stocks; this stock purchase agreement, and you can get for yourself an idea that how tardy, cumbersome and bureaucratic this process can get. Because when there’s money involved in an official setting, you can always be sure that there is going to be a lot of paperwork, a lot of forms to be signed, a lot of legal jargon and a lot of signatures. And a stock purchase agreement is no different. 

On financial websites, a stock purchase agreement is explained as having the legal power to be shown as ‘proof of purchase of a stock/s’ and a legally binding document, one that ‘protects both the buyer and seller from foul play or any other risk that is beyond the normal operating risks of a stock exchange or a stock market’. Then again, financial websites and their blogs can be better understood by people in said profession, and us industry outsiders have no right knowing about any of that jargon.

Related Read: Understanding High Cost Mortgage Loan

So, what is a stock purchase agreement and what are its uses? This will especially be helpful if you’re planning on buying stocks anytime soon (now that Tesla stock is getting somewhat affordable) and are unaware of the technicalities that follow and accompany such a procedure. For stock-buying tips, consult Wikipedia or YouTube; it is a game that seems simple, but really isn’t: becoming Warren Buffet is no easy feat and the stock market itself is the place where financial geniuses come to battle, really.

What is a stock purchase agreement?

It’s pretty simple; actually, it’s in the name, if you’re even faintly aware of agreements and legal documents. When you buy a stock, you don’t just willy-nilly get up and buy a piece of the company. Since it isn’t a physical or concrete concept (more of a virtual/ abstract market and product), you will need proof of ownership.

So when you buy a stock from a stockbroker or your friend who has been really about this whole ‘investor life’, you need a deed, that officially proclaims that you own that piece of stock of the company and the other person also signs on it, saying that the buyer officially holds the stock of the company and is entitled to be paid from the dividends of the profits earned by the company, according to the percentage or amount of stock owned. This document, signed by both the seller and the buyer, is called the stock purchase agreement and is the only legal, acceptable way to prove that a stock purchase has been made. 

What is in a stock purchase agreement?

As all documents go, they have writing in it, that like all of us, one chooses to ignore and forego in favor of where the real deal is. The devil is in the details, but who wants to meet the devil, right? Anyways, a stock purchase agreement contains a lot of important information, from type of stock to the not so important ones, like dates and days. However, the latter can come in handy as many times such deals are touted by people of the unscrupulous nature, which can lead to a court battle. 

Here are a few of the important components of a stock purchase agreement,

  • Date, day: The official stock purchase agreement has the date and day of the purchase on the top of the document, which is imperative considering this issue can frequently rise when a stock is being sold or bought, of the incongruencies in the date and day of purchases and whatnot.
  • Particulars of people/ parties involved: The stock purchase agreement, be it between two people or two multi-billion-dollar companies, will always have all the particulars of all the parties involved; from names to addresses and will always be labelled as buyers and sellers. No confusion will ever rise out of which party is the seller and which is the buyer/ purchaser. 
  • Particulars of stocks themselves: The next logical part would be to mention the particular details of the stocks involved in the transfer. Everything from the name of the company whose stocks are being sold, down to the exact dollar price of a single share (before the calculated total sum) is jotted down on the stock purchase agreement. Just to be sure.
  • Officially conveying the ownership: The stock purchase agreement also contains in it a seemingly trivial and futile paragraph which states that the shares have been officially transferred to the purchasing party. This part, in fact, is the most important aspect of the entire agreement and without it, an agreement can be declared null and void. Because the signatures at the end of it convey the official stance that the stocks have now been sold to the purchasing party legally and any purchase or selling without it will not be deemed legal.
  • Disclosure agreements: Next the party has to sign on a disclosure agreement, which states that every tiny little detail, nuance or right has been disclosed and reserved and that the selling party will not be responsible for anything that occurs after the date of the purchase stated in the disclosure agreement. Both the parties agree to it and disclose that no omissions were made in the sale and purchase.
  • Witnesses and other provisions: Last up are the signatures of witnesses and other legal points that need to be stated for the obvious to satisfy requirements of the guidelines set by state authorities on taxation and stock exchanges. This includes provisions that confirm that the sale and purchase was done under the ambit of the law and any other laws that the stock agreement conforms to. The witnesses section is reserved for people to sign their presence at the time and point of purchase and is equally imperative as the other parts of the stock purchase agreement.