Understanding How Trading Works

By Martin Lukac

What does it mean to trade stocks? You hear the phrase all the time. Are you trading one stock for another?
Actually, to trade stock means that you are buying or selling stock. When you hear that one billion shares were traded in a single day, it means that one billion shares were bought and sold. It is important for investors to understand the basics of how the market works in order to trade successfully.
There are two basic ways exchanges execute trades, either on the exchange floor or electronically.
More trading is moving towards the networks and off of the floors, but there is resistance to this trend. Many markets, including NASDAQ, trade stock electronically. However, the futures' market is trading in person on the floor of several exchanges.
When you see an image of the stock market on television, you are often looking at trading on the floor of the New York Stock Exchange. This is where you see hundreds of people rushing around and shouting, watching monitors and entering data. It looks extremely out of control.
However, it is a very organized dance. Here is how a very simple trade works on the floor. You tell your broker to buy 100 shares of XYZ at market. The broker's order department sends the order to the floor clerk on the exchange. The floor clerk alerts on of the floor traders who finds another floor trader who wants to sell 100 shares of XYZ. This sounds like a hard task, but the floor trader knows exactly who to talk to. The two traders will agree on a price and complete the deal. Your broker will call you back with the final price. The entire trade can take a few minutes to a few hours.
There has been a large push to move trading to an electronic system. The electronic market uses large computer networks to match buyers and sellers. There are not human traders involved. This method is fast and efficient. Many large institutions actually prefer this method of trading.
Individual investors find that electronic trades give them almost instant confirmations on trades. You still need a broker to handle trades because individuals are not allowed access to the electronic markets. Your broker will access the exchange network and use the system to find a buyer or seller for your stock needs.
Understanding the market takes you one step closer to understanding investing. Beginning investors should take the time to research every aspect of the market. If something was to go wrong, it is important to know what goes on behind the scenes.
Along with understanding how trading works, the investor should understand how the market works. There are many factors that affect the stock market and the wise investor understands these factors and is prepared for them. Remember, investing isn't a promise of returns. But if you invest wisely and diversify your portfolio, you have a great chance of meeting your investment goals.
Martin Lukac represents RateTake.com Mortgage mortgage marketplace. RateTake matches consumers with multiple lenders offering low mortgage rates from our network of accredited lenders.
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