The term "Stock Trading" should not be taken literally. Similar to trading baseball cards, stock trading is different. "I'll exchange you 100 IBMs for 100 Intels," for instance. No, it doesn't operate that way. In the financial markets' language, "trade" is to buy and sell. Most individuals don't understand how a system that can handle trading one billion shares in a single day functions. Our financial markets are unquestionably marvels of modern efficiency. Traders and markets must handle orders for 100 Acme Kumquats shares with the same care and documentation as orders for 100,000 MegaCorp shares. Although you don't need to be an expert on every technical aspect of buying and selling stocks, it's still necessary for investors to have a fundamental understanding of how the markets operate.
Key Takeaways
- Trading is a term used in the stock market to describe stock purchases and sales rather than direct stock-for-stock transactions.
- By locating buyers or sellers for the equities you want to trade through your broker, floor traders carry out trades on the exchange's floor.
- It can frequently take several days for floor traders to settle fully.
- More brokers and significant institutional traders are now making trades online, with confirmation occurring almost immediately.
Two Basic Methods
Exchanges can execute a trade either on the exchange floor or electronically. A significant effort has been made since December 2017 to shift more trade to networks rather than trading floors; however, this effort has encountered some resistance. Electronic stock trading is standard in most marketplaces, most notably the Nasdaq. But that's a separate matter. The futures markets also trade in person on the floors of several exchanges.Exchange Floor Trades
Due to representations of the market on television and in movies, the majority of people have an image of trading on the floor of the New York Stock Exchange (NYSE). Hundreds of people may be seen hurrying about the market when it's open, shouting and pointing to one another, conversing on phones, glancing at monitors, and entering data into terminals. It appears to be a mess. The trading floor settles down at the end of the day, but depending on the type of trade, it may take up to three additional trading days for a trade to settle. Here is a step-by-step explanation of how to execute a straightforward trade on the NYSE.- Your broker is instructed to purchase 100 shares of Acme Kumquats at market price.
- Your broker's order department sends the order to the floor clerk at the exchange.
- One of the company's floor traders receives a warning from the floor clerk and locates a second-floor trader eager to sell 100 shares of Acme Kumquats. Because the floor trader is aware of which floor traders make markets in specific equities, this is simpler than it may sound.
- They settle on a price and finalize the transaction. Your broker calls you back with the final price after the notification procedure has continued up the line. Depending on the stock and the market, the process could take a short while or much longer. You will get the confirmation notification in the mail a few days later.
Electronic Trades
Some people are unsure about how long a human-based system like the NYSE can maintain the requisite level of service in this quick-paced society. While its rival Nasdaq is entirely electronic, the NYSE only manages a small portion of its turnover electronically. Instead of using human brokers, the electronic markets employ enormous computer networks to connect buyers and sellers. Despite lacking the beautiful and thrilling pictures of the NYSE floor, this system is quick and effective. Many large institutional traders prefer this form of trading, including pension funds, mutual funds, and others. If that is important to you, private investors frequently receive confirmations of their deals nearly immediately. Bringing you one step nearer to the market also makes it easier to exert more control over online investing. Nevertheless, since ordinary people cannot access computerized markets, you still need a broker to conduct your deals. These days, trading with an app-based broker on an iPhone or an Android smartphone is simple. Depending on your order, the system locates a buyer or seller through your broker's connection to the exchange network. How do you interpret all of this? All of this will be kept a secret from you if the system functions, which it does most of the time. It's crucial to understand what's happening behind the scenes in case something goes wrong.What Else You Need to Know
Learn more about how stock prices are determined, how to interpret stock quotations, bid and ask prices, and stock orders if you intend to manage your investments and make your own trading decisions. To prevent losing all of your gains, it's crucial to know how to use trailing stops to protect stock earnings. Additionally, it would help if you learned how to avoid errors like purchasing high and selling low or falling victim to investment fraud.