How Does The Stock Market Work?

Stock Market Basics: Traditional and Electronic Trading

I was talking with a friend and the question came up “how does the stock market work?” This got us talking about how the stock market and trading has evolved through the years.

The financial markets are a complex entity with their own institutional and economic structures that play a vital role in how stock prices are established. These structures also influence the stability and orderliness of the marketplace. The primary ways that these financial markets are organized include over-the-counter and floor stock trading. However, recent electronic facilities have greatly blurred these traditional distinctions and are changing how the stock market works.

When you purchase and own a stock, essentially you own part of that company. Each share you buy represents a small part of that ownership. When a person or business holds a greater number of shares, they own a larger percentage of the company. The objective for investors is obtaining bigger dividends as the company profits and stock shares increase in value.

how does the stock market work

The traditional method of stock trading occurs on an exchange floor in an open manner. On stock exchange floors, market trading is usually noisy and chaotic. These areas are filled with many investors who are shouting, gesturing and running around. Stock traders are frequently seen talking on phones, working on computer terminals and monitoring their consoles closely.

With electronic online market trading, investors use computer networks instead of trading on the market floor. Large networks of computers are utilized to match buyers and sellers conducting trades through an electronic marketplace. Although this technique isn’t perceived to be as exciting and bustling as a market exchange floor atmosphere, it is much faster and more effective. Computer trading has truly revolutionized how the stock market works.

If you are interested in stock market trading whether electronically or through conventional methods, the first step is getting an investment account through a broker. To begin traditional floor stock trading, an individual makes a request to the broker to purchase a certain amount of shares. After this request is made, the brokerage firm forwards your order to a floor clerk. The details are passed to another trader who sells the requested shares. The transaction finishes when a specified price is agreed upon. The investor is alerted after a final conclusion is confirmed. The process can take some time, based on several factors such as price fluctuation and current market movement.

Investing online is far less complicated and much faster. This is because computers and networks can match the selling and buying of stocks in real time. For investors that are savvy, they have the distinct benefit of instant and automatic trading updates live. Whether you are at home or at the office, as long as you have Internet access it is possible to quickly calculate which direction stocks are moving. Another advantage is having access to a variety of tracking tools. Many online brokerage firms offer these tools at no cost for their trading clients.

The emergence of electronic stock trading has decreased the necessity for physical exchanges. In fact, many conventional trading floors have been closing. The communication of executions and orders are mostly conducted electronically. Because of computers the NASDAQ and the London Stock Exchange are both completely electronic. Others have started phasing out floor trading, however some offer both electronic and floor transactions. Even on exchange floors, computer-generated electronic messages are frequently used. It’s not unusual for investors nowadays to buy and sell stocks through e-mail or instant messaging platforms.

In the simplest term on how the stock market works, it is facilitating the buying and selling of securities between investors. Just imagine the difficulty if you had to buy or sell shares on your own without this large marketplace. Participants meet and then decide on a mutual price of shares. We have all seen pictures of trading floors, in which people are signaling, yelling, waving and wildly moving their arms. This method is slowly giving in to virtual stock trading. Whichever your choice, it’s highly recommended to use an established and experienced brokerage firm to facilitate your trading activity. I use tradeking, but scottrade is good as well.

 

 

Author: KC Beavers

KC Beavers is a semi-retired entrepreneur. The subject of personal finance has always fascinated him. In an effort to not bore those around him with all his love of personal finance as much he has come here to bore all of you instead.

4 comments
FamilMoneyValue
FamilMoneyValue

You have given a nice simplified explanation.  Although some brokers may transact trades via email, mine won't.

FrugalRules
FrugalRules

Good breakdown on some of the basics of the stock market. It can be concerning for some that buying stocks is basically just a computer communicating with other computers to execute the trade, but that is the environment we're in and will likely only continue that way.

StumbleForward
StumbleForward

I've always been curious to jump into the market and try my hand at buying stocks online but I've never taken the time to learn how it all works to earn a decent profit from it.  

Ronald_Mueller
Ronald_Mueller

I need to educate myself on how to work and play with stocks.