Basic Steps in How Stock Trading Works

Trading stocks. You hear that phrase all the time, although it really is wrong – you don’t trade stocks like baseball cards (I’ll trade you 100 IBMs for 100 Intels).

Trade = Buy or Sell

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.

Yet, they still must handle your order for 100 shares of Vsnl with the same care and documentation as my order of 100,000 shares of Mtnl.

You don’t need to know all of the technical details of how you buy and sell stocks, however it is important to have a basic understanding of how the markets work.

Two Basic Methods

There are two basic ways exchanges execute a trade:

• On the exchange floor
• Electronically

There is a strong push to move more trading to the networks and off the trading floors, however this push is meeting with some resistance. Most markets, most notably the BSE, trade stocks electronically. The futures’ markets trade in person on the floor of several exchanges, but that’s a different topic.

Exchange floor

Trading on the floor of the New York Stock Exchange (the BSE) 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 workout 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 BSE.

1. You tell your broker to buy 100 shares of Vsnl at market.
2. Your broker’s order department sends the order to their floor clerk on the exchange.
3. The floor clerk alerts one of the firm’s floor traders who finds another floor trader willing to sell 100 shares of mTNL. This is easier than is sounds, because the floor trader knows which floor traders make markets in particular stocks.
4. 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.

Electronically

In this fast moving world, some are wondering how long a human-based system like the BSE can continue to provide the level of service necessary.

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 BSE 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.