Understanding Stock Markets For Beginners Part Two
In part one on my two part series of articles about stock markets, I informed you that a stock market is a public market that is utilized to trade company stock and derivatives at a price that is agreed upon. I listed a few basic facts on stocks and derivatives, and I told you that people who participate in the stock market can range from individual stock investors to hedge fund traders. Now a bit on trading stocks.
An auction market model guides actual trades because a potential buyer will bid a specific price for a stock, while a potential seller asks for a specific price for the stock. When the bid and ask prices match up, a sale will take place, and if there are multiple bidders or askers at a given price, it is on a first come first served basis.
Some stock markets are physical locations with a trading floor where exchanges will take place. In person, transactions will be completed by a method known as open outcry. This is a type of auction that is utilized in stock exchanges and it can be mayhem! Traders may enter “verbal” bids and offers for the stocks that they want to buy at the same time.
The New York Stock Exchange is a physical exchange. Investors order stocks that they would like to buy or sell, and these orders are given to a floor broker, who will then go to the floor trading post specialist for that stock to trade the order. The specialist has an important job, which is to match buy and sell orders utilizing the open outcry method. Sometimes something called a spread happens. This is when the seller and the buyer do not agree on the price. In this case, no trade will take place at the time, and the specialist will utilize their own money or stock to close the difference when they find it to be necessary. When a trade has been made the details are sent back to the brokerage firm, which will then let the investor who placed the order know what occurred.
The other type of stock exchange is virtual, like the NASDAQ that I mentioned before, which is made up of a network of computers where trades will be made electronically. The process of trading electronically is similar to a physical exchange, but buyers and sellers will be electronically matched. NASDAQ market makers, who are companies or individuals that will quote both a buy and sell price, will always provide both at which they will always purchase or sell their stock.
Mallory Megan works for Rapid Recovery Solution and writes articles on credit collection agencies.
