There is an image that comes to people’s minds when stock trading is mentioned. An enormous floor with men in business suits yelling and gesturing. There seems to be no rhyme or reason to their shouting. This is an idealized movie version of the New York Stock Exchange. In fact, stock trading is a complicated process that keeps businesses in operation and investors earning money.
The foundation of stock trading is that of companies offering shares in their business for purchase and sale. Investors that buy the shares receive a proportionate ownership in the company. How well a business does on the market determines how much profit an investor earns.
There are two different systems for access to the stock market. The first is on an exchange floor where buying and selling shares is executed through traditional means. The second is through the Internet stock market sites.
Exchange Floor Trading
The exchange floor, although not exactly as portrayed in the movies, has thousands of brokers who negotiate trades for their clients, the investors.
There is a procedure that is followed by the brokers for uncomplicated trades. The investor contacts a broker’s office and places an order for a specified amount of stocks in a certain company. The broker’s order department then provides the order information to a floor clerk located on the exchange floor. The clerk relays the information to the floor traders. The floor traders meet with other traders who have investors with shares that they are willing to sell in the requested companies. Once both parties’ traders have agreed upon the price they close the deal. The final details are provided by the reverse process to the broker, who informs the investor of the finalized details.
Negotiations between traders depend on the status of the market and how well the shares are performing. The bargaining can take anywhere from just a few minutes to longer. If the order is large or complex, the foundation of trading remains the same but there may be more complicated procedures to follow.
Computers and technology are ushering in a new trend in trading stocks. The National Association of Securities Dealers Automated Quotations trades stocks wholly through advanced online systems.
Traditional stockbrokers are dispensed with by online stock markets. Computers instead pair up buyers and sellers. Transactions executed in this matter are quicker and more effectual.
Electronic trading also provides the investor with expedited confirmations. Investors have the benefit of monitoring the investments through the Internet. Brokers still complete the trades however, as online stock markets are not directly accessible by investors.
The only part of the process an investor usually is involved in is their contact with their broker and receipt of regular reports. The remainder of the trading mechanism is carried out without any direct interaction from the investor.
The theory behind stock trading is actually quite simple. Investors purchase shares in businesses through stocks in order that those businesses can continue operations. The investors earn a share of the business’s earnings in return. It is a process that benefits both parties.