What is Stock Trading?
Trading stocks. You hear that phrase all the time, although it really
is wrong you don’t trade stocks like two kids swapping
bicycles or Mp3 players. The process is somewhat different involving a
buy and sell process.
Trade = Buy or Sell
To “trade” means to buy and sell in the jargon of
the financial markets. How a system that can accommodate one billion
shares trading in a single day works is a mystery to most people. No
doubt, our financial markets are marvels of technological
efficiency. Yet, they still must handle your order for 100
shares of Aloha Coffee with the same care and documentation as as
another order of 100,000 shares of ABC Cheese. You
don’t need to know all of the technical details of how you
buy and sell stocks, however it is important to have a basic
understanding of how the markets work. If you want to dig deeper, there
are tons of research articles and books written about the markets.
Two Basic Methods
There are two basic ways exchanges execute a trade:
- On the exchange floor
- Electronically
There is a strong push to move more trading to the
networks and off the trading floors, however this push is meeting with
some 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 a different topic.
Exchange floor
Trading on the floor of the New York Stock
Exchange (the NYSE) is the image most people have thanks to television
and the movies of how the market works. 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 look any more chaotic.
Electronically
In this fast moving world, some are wondering how long a human-based
system like the NYSE can continue to provide the level of service
necessary. The NYSE handles a small percentage of its volume
electronically, while the rival NASDAQ is completely electronic. The
electronic markets use vast computer networks to match buyers and
sellers, rather than human brokers. While this system lacks the
romantic and exciting images of the NYSE floor, it is efficient and
fast. Many large institutional traders, such as pension funds, mutual
funds, and so forth, prefer this method of trading.
How Stocks Trade
Stocks trade based on buy and sell orders of
investors and stockbrokers and to purchase a stock one simply looks for
a stock they are interested in, decides the quantity they wish to buy,
and makes the purchases. Stocks are nowadays almost exclusively traded
electronically using ECNs (Exchange Communication Networks).
These ECNs automate the process and in moments one is
trading, meaning owning stock, these same systems also will execute a
stock sell when one is desired. The sale is
typically grouped together with others wishing to sell and a buyer is
found. The money from a sale or purchase of a stock is
typically funded by an account with an online stockbroker or retail
stockbroker. Stocks are often used for diversifying a
portfolio, and should be evaluated by a professional.
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