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Stock Trading Basics

A typical view of stock trading for most people is the one we see in movies where men in suits essentially shout and wrestle each other in some building in New York, shouting “Buy, Buy, Buy!” or “Sell, Sell, Sell!”. Although to some extent, there is some truth to this image, trading in the stock market is actually a much more structured practice that helps many people earn money and keeps businesses alive.

At its most basic level, trading consists of the buying and selling of stocks, between individuals or companies, through brokers. Through buying a share of stock (a slice of ownership) in a particular company, an individual can then benefit and earn money from the performance of the company.

There are two basic methods in which the stock market operates

1. On the exchange floor where buying and selling is carried out more traditionally
2. Electronically where technology takes on the exchange game in order to buy and sell more efficiently

Stock Trading On The Exchange Floor

The trading that occurs on the more traditional exchange floor of the New York Stock Exchange (NYSE), or any other exchange around the world, is basically what most of us have become accustomed to from seeing it in the movies and on television. Basically, the NYSE consists of many brokers who negotiate the deals for individuals who wish to trade stock.

As hectic as the stock exchange floor may seem, there is actually a common pattern that occurs during most trades:

• First, an order to buy a certain number of stocks is negotiatedby a client through their broker.
• After this, the brokers order department forwards this arrangement to their floor clerk on the exchange.
• The floor clerk then informs the company’s floor traders in order to find other traders that are willing to sell the desired number of stocks in the company.
• After the two parties agree on a price and close the deal, the message is forwarded back up the line, and the broker then informs the interested buyer on the final price.

Negotiations may take a few minutes or even longer, depending on the performance of the company as well as the market as a whole. For more complex trades and larger orders of stocks however, there may be a more complicated process to go through but the principles stay practically the same.

Stock Trading Electronically

A growing trend these days, is trading stocks electronically, which is done through advanced computer systems. Unlike the NYSE that generally operates through the manpower of brokers, its counterpart, the National Association of Securities Dealers Automated Quotations (NASDAQ), trades stocks only electronically.

These electronic markets remove the human stockbrokers and instead make use of computer software and networks to match buyers and sellers. Through this method, transactions are usually faster and more efficient.

Electronic trading opens up a number of benefits to investors, benefits such as being able to get faster confirmations, as well as giving them greater control by having online share dealing readily available through the Internet. However, brokers basically still handle the actual trades, as investors do not have direct access to the electronic stock markets.

The process that takes place in both methods, however, is normally hidden from investors. In most cases, if you are an investor, a call from your stockbroker and regular updates on your stock investments would be provided for you, but you will not really get to see what goes on behind the scenes.

Through the investments that individuals make, many businesses are kept afloat and running. And in exchange for this, investors will get a fair share of the companies’ earnings, for example – when dividends are paid. Stock trading may be an intricate process, but at the end of the day, many people benefit from all of it. As a consequence, the overall concept becomes easier to understand.