Functioning of The Stock Market

Table of Contents
Chapter 1: Introduction to Trading Stocks
Chapter 2: Different Categories of Stocks
Chapter 3: Functioning of The Stock Market
Chapter 4: Stock Market and Price Movements
Chapter 5: How to Buy Stocks
Chapter 6: Choosing Your Investment Strategy

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Chapter 3: Functioning of The Stock Market
Physical and Virtual Stock Exchanges

Chapter 3: Functioning of The Stock Market

When people talk of trading in stocks they don’t mean that they traded their 150 shares in IBM for 150 shares in HP. What they really mean is that they either sold or bought shares of some company. The stock market is the place where you can buy and sell shares.

Brokers – Facilitators of stock trading

You can’t directly walk into the NYSE and start selling or buying stocks on the ‘floor’. This activity is carried out by brokers. The process appears complex but in reality it is based on a simple and efficient order routing mechanism.

Let’s say you want to buy 100 shares of Company A. You call up your broker, and tell him how many shares, of which company and at what price you want to buy. The broker passes on the information to his representatives on the ‘floor’ at the NYSE.

They find a broker there who has shares to sell from this company at your preferred price. They negotiate and close the deal. The intimation is sent to you and the client who sold the shares. You pay the broker a commission for completing your deal.

This is a simple and very straightforward transaction. There are much more complex deals which are conducted with the same efficiency, speed and accuracy in the stock exchange. When we talk about brokers, remember these may be individuals or brokerage firms, like Charles Schwab, which carry out these functions.

Physical and Virtual Stock Exchanges

The word stock market conjures up images of a frenzied crowd of people, all staring at enormous ticker tape screens, gesturing wildly to complete deals. Although that still exists today to some extent, like in the New York Stock Exchange (NYSE), new stock exchanges like the NASDAQ are highly technology driven with trades executed through computers in a matter of milliseconds.

You can trade in stocks listed on the NASDAQ without a broker being present on the floor of the exchange. Although the NYSE too trades a portion of its stocks electronically, it is not a completely virtual exchange.

In an electronic exchange, vast computers take on a major part of the broker’s role in bringing together sellers and buyers. You still route orders through your broker who uses the exchange’s network to facilitate the deal. The speed of transactions is significantly higher than in those carried out through physical exchanges. The accuracy of orders is also higher.

There is a lesser chance of miscommunication with your broker because you are more in control of your entire selling or buying process. As information technology gains ground and more and more people begin to depend heavily on computers, electronic stock exchanges too are growing in popularity by leaps and bounds.

Next Chapter: Stock Market and Price Movements