The balance between supply and demand sets stock prices. When demand is high and supply is low, prices rise.
When supply is high and demand is low, prices fall. Stock prices are driven by the relationship between buyers and sellers.
Attractive stocks have more buyers than sellers, which drives up prices, while less attractive stocks feel the reverse effect. Investors are buying future growth when they invest in stocks.
Yet, the stock’s price may float up or down based on some broad market or economic factors that may only indirectly affect the company. The Fed is the single most important federal agency for stock market investors because its actions directly affect the markets.
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 Acme Kumquats with the same care and documentation as another person’s order of 100,000 shares of MegaCorp.
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. There are two basic ways exchanges execute a trade: on the exchange floor and 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 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 workout all the trades and get ready for the next day. The first step in the execution of a simple trade on the NYSE starts with you telling your broker to buy 100 shares of Acme Kumquats (or any other share) at market.
Your broker’s order department sends the order to their floor clerk on the exchange. Then 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 is 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. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.
Ronald Pedactor is a former stock broker and has worked as a stock trading trainer for the last 19 years helping individuals determine the best daily stock picks. He has been a financial trainer and a guest lecturer for over 11 years.
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