Stock trading. You hear that phrase all the time, although it really is wrong, you don’t trade stocks like baseball cards.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.
New investors taking their first steps towards learning the basics of stock trading should have access to multiple sources of quality education.
Just like riding a bike, trial and error coupled with the ability to keep pressing forth will eventually lead to success.
One great advantage of stock trading lies in the fact that the game itself lasts a lifetime. Investors have years to develop and hone their skills. Strategies used twenty years ago are still utilized today. The game is always in full force.
You don’t need to know all of the technical details of how you buy and sell stocks, but it is important to have a basic understanding of how the markets work. There are two basic ways exchanges to execute stock trading:
-On the exchange floor
There is a strong push to move more trading to the networks and off the trading floors, but 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.
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. Yet, at the end of the day, the markets work out all the trades and get ready for the next day. Here is a step-by-step walk through the execution of a simple trade on the NYSE: You tell your broker to buy 100 shares of Acme Kumquats at market.
Your broker’s order department sends the order to their floor clerk on the exchange. The floor clerk alerts one of the firm’s floor traders who finds another floor trader willing to sell 100 shares of Acme Kumquats. This is easier than it sounds because the floor trader knows which floor traders make markets in particular stocks.
The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice in the mail.
Of course, this example was a simple trade, complex trades and large blocks of stocks involve considerable more detail.
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. For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of online investing by putting you one step closer to the market.
You still need a broker to handle your trades, cause individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.
What does this all mean to you? If the system works, and it does most of the time, all of this will be hidden from you, however, if something goes wrong it’s important to have an idea of what’s going on behind the scenes.