If you only listen to the slang, you would think that the stock market is like swapping cooking recipes…. “If you’ll give me your recipe for your mom’s Apple Pie, I’ll give you mine for Baked Eggplant.” The phrase “stock trading” in market talk means to buy or sell shares. While the technical explanation of a system that can manage the stock trading of over one billion shares per day would be staggering, there is still a general explanation of how to invest in stocks.
There are two basic forms of stock trading. They are:
Electronic
There is a concerted effort to move more trading to the computers and off the trading floors. This effort is meeting with resistance. Most markets, most notably the NASDAQ, trade stocks electronically. The futures’ markets trade in person on the floor of several exchanges, but that’s something to discuss at a different time. Here are the benefits of successful trading done electronically:
- The electronic markets use large computer networks to match buyers and sellers, rather than human brokers. Many large institutional traders, such as hedge funds, mutual funds, and so forth, prefer this method of trading.
- For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of stock market online investing by putting you one step closer to the market.
- You still need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.
Exchange Floor
If you think of traditional stock market basics, you are probably visualizing the floor of the New York Stock Exchange. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It could not appear any more out of control. At the end of the day, the markets work out all the trades and get ready for the next day.
Here is a step-by-step walk through the execution of a simple trade on the stock market floor:
- You tell your broker to buy 100 shares of ABC Corp at market.
- Your broker’s order department sends the order to their floor clerk on the exchange.
- The floor clerk alerts one of the firm’s floor traders, who find another floor trader willing to sell 100 shares of ABC Corp.
- The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. A few days later, you will receive confirmation of the transaction in the mail.
The markets handle tremendous amounts of stock market information. They are fast and efficient and they provide traders with the ability to find and make transactions in the blink of an eye. Even with beginner investing, stock trading can be as easy as mom’s Apple Pie.
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