Trading Of Stocks And How It Is Done

November 20, 2010 by
Filed under Stock Market Trading

Stocks in most instances are traded on exchanges. Exchanges are places and/or platforms where buyers and sellers come together and then figure out what a fair price that both parties can agree upon. Not all exchanges are exactly the same. Some are found in physical locations where all of the transactions take place on a floor that is there for the purposes of trading.

There is another type of exchange that is gaining in popularity in recent years. This is the virtual exchange that is made up of a network of computers that make it possible for trading to be done in an electronic manner.

The purpose behind the concept of the stock market is to allow for the exchange of securities between those individuals who wish to buy and those who wish to sell. By so doing, this reduces the risks that are inherent in the investing process. Here we must stop and distinguish between two different types of markets – the primary market and the secondary market. The primary market is a place where securities are first created by way of an initial public offering (IPO). On the other hand, the secondary market is a place where investors trade securities that were previously issued in order to not have to involve any of the issuing companies. The stock market is an example of a secondary market.

The New York Stock Exchange is the most well-known and most prestigious stock market exchange across the globe. Founded in 1792, the “Big Board” as it is sometimes referred to is the stock market of choice for the biggest companies in America such as General Electric, Citigroup, Coca Cola, Gillette, McDonald’s and Wal-Mart. This is a very powerful stock market where million dollar trades happen on a daily basis.

Trading on the New York Stock Exchange (NYSE) is done on a trading floor on a face-to-face basis. This is also sometimes called a listed exchange. It is important to note however, that computers do play a significant role in the trading that goes on here.

On the NYSE orders arrive by way of brokerage firms that are a part of the exchange. From there the orders make their way onto the floor where brokers are waiting at a specific spot on the floor to find out what stocks are trading that day. This spot is referred to as the trading post and there is a person there called the specialist whose job it is to carefully pair up buyers and sellers.

The prices for every stock are determined using what is known as the auction method. What this means is that the current price for the stock is the highest that any buyer is willing to purchase it for and the lowest price which a person is willing to sell it for. Once the negotiations are over and the trade has taken place, the details of it are delivered to the brokerage firm. From there the investor who placed the order for the stock is notified of the trade. Human communication and contact plays an integral role in the process of trading, but trading has changed somewhat now that the modern computer has become such an indispensable piece of technology.