Stock Trading – How It Works

What Is a Trade?

Most people nowadays misunderstand the expression ‘’stock trading’’. Trading does not mean exchanging in its literal sense. Instead, it refers to selling and purchasing in the world of financial markets. Today’s financial markets are able to pull off exchanges that are worth even a billion in a day. It remains a mystery to many how such a system sustains itself and still operates without a single flaw.

Whether it’s an order of 100,000 MegaCorp shares or just a 100 shares of Acme Kumquats, markets have to perform them with the same level of efficiency.

There are many ways of approaching stock trading, but you don’t need to know all the details in order to purchase/sell stocks. Only some of the key aspects are worth paying attention to.

The Key Methods

Exchanges can be done either through an exchange floor or virtually (in an electronic manner). Despite the fact that there is a huge emphasis on transforming the whole platform into a virtual one, some people still object to the idea. Some markets like operating on a trading floor (in person) while others (such as NASDAQ) employ electronic methods of business. We’ll provide you with a brief breakdown of how each of these methods performs and looks like.

Trading In Person (On The Floor)

We’ll use New York Stock Exchange to exemplify this method. Usually, what you picture when you think about in-person stock exchange is pure chaos. People are rushing everywhere, they’re constantly monitoring info on the monitors and terminals, yelling inconsistently, and always talking on the phone. It takes up to three days for a trade to settle, before another starts.

It’s understandable that more complex trades involve more people and procedures. This is why we will describe how a simple trade would take place in 4 steps.

  1. The first thing would be to inform your broker about buying shares (For example, 100 Acme Kumquat shares).
  2. Next, the broker sends your order along with an issue for an exchange.
  3. Having found another trader who is willing to sell 100 Acme Kumquat shares, the floor’s clerk informs both of you (a buyer and a seller).
  4. Finally, you two come to an agreement and strike a bargain. The only thing that is left for your broker to do is to confirm the final price. This usually lasts for a couple of minutes. However, the length of the process solely depends on the stock as well as the market. The very last step is you, receiving a final confirmation letter/e-mail.

Virtual (Electronic) Trades

As mentioned, each day trading resorts to doing business electronically bit by bit. The addition of an online trading system based on algorithms that handle exchanges has proven to be quite useful. Certain floor systems such as NYSE still provide equal service, which is a bit amusing considering that the majority uses an online variant.

However, if we compare this method to that of NYSE, we will see that it lacks the charm of NYSE’s interior. Although, it compensates for it by being fast and efficient, which is why it’s preferred by many. As a single investor, you get instant access to everything, but you still need a broker who will handle everything.

Some Additional Tips

If you’re considering investing and trading, it’s better that you inform yourself as best as you can. Be sure to pay close attention to how stock prices and stock quotes work. Also, stock orders, stock profit protection, and bid/offer systems play a huge role in all of this. Inform yourself well as there are plenty of investment scams all around the platform.

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