The Introduction
In the financial market, the term “trading” refers to buying and selling stocks rather than making direct trades between shares. Stocks are not traded like baseball cards. For instance, “I will trade you 100 shares of IBM for 100 shares of Intel.” No, that is not how it works. In financial market terms, trading means buying and selling.
On a technical level, investors do not need to know all the technical details about how to buy and sell stocks, but a basic understanding of how markets operate is important for the investor.
Methods of Executing Trades
There are two basic ways to execute trades in financial markets: on the exchange floor or electronically. It is noted that there is a strong push to move more trading to networks and away from trading floors, but there is some resistance to this shift. Stocks are mostly traded electronically in most markets, particularly the NASDAQ. As for futures markets, transactions are conducted in person on the floors of many exchanges.
Floor Transactions
Trading stocks on the New York Stock Exchange (NYSE) is the picture that most people imagine, thanks to television and movies depicting how the market works. When the market is open, you see hundreds of people bustling around, making signals to one another, talking on phones, watching screens, and entering data into terminals. It looks chaotic.
At the end of the trading session, the floor calms down, but it can take up to three additional trading days to settle the transaction, depending on the type of trade. You can imagine the process of buying 100 shares of Acme Kumquats as follows:
First, you tell your broker to buy 100 shares of Acme Kumquats at the market price. The broker’s order department sends the order to a floor clerk on the exchange. The floor clerk informs a trader at the firm, who finds another trader willing to sell 100 shares of Acme Kumquats. The two agree on a price and complete the trade. The notification process goes back up, and your broker calls you with the final price. The process may take a few minutes or more, depending on the stock and the market. After a few days, you will receive a confirmation notice by mail.
Electronic Transactions
In this fast-paced world, some wonder how long a system that relies on humans, like the New York Stock Exchange, can provide the level of service required. The New York Stock Exchange handles a small percentage of its volume electronically, while the competing NASDAQ operates fully electronically.
Electronic markets use vast computer networks to match buyers and sellers, instead of human brokers. While this system does not have the romantic and thrilling images of the New York Stock Exchange floor, it is efficient and fast. Many large institutional traders such as pension funds and mutual funds prefer this method of trading.
For the individual investor, you can often get an approximate immediate confirmation on your trades if that matters to you. It also facilitates additional control over investing online by placing you very close to the market.
However, you still need a broker to handle your trades, as individuals do not have access to electronic markets. Your broker uses the exchange’s network to find a buyer or seller based on your request. These days, you can easily execute trades through a mobile app broker on your Android or iPhone.
What does all this mean for you? If the system is working, and it usually does, all of this will be hidden from you. However, if something goes wrong, it is important to be aware of what happens behind the scenes.
What
What You Need to Know
If you are planning to manage your investments and make your own trading decisions, you should learn a bit more about how to determine stock prices, how to understand buy and sell orders, and stock requests. It is also important to understand how to use profit locking to protect profits from stocks and avoid losing all the gains you have made.
You will also need to learn how to avoid mistakes such as buying high and selling low or falling into investment fraud traps.
Conclusion
In the end, you should be able to understand how stock trading and stock exchange operations work. While you do not need to know all the technical details, you should understand the basic principles so that you can make informed investment decisions and understand what happens behind the scenes when dealing with the financial market.
Source: https://www.thebalancemoney.com/trading-basics-3141299
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