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Learn Stock Market Trading Tips
Stock
Trading Essentials
When someone uses the word “trade” in regard
to stocks, they are referring to the act of buying
or selling stocks. There are two main methods that stocks are traded:
through the Internet or on the exchange floor.
The New York Stock Exchange (or NYSE) is a person-based stock
trading system. The NYSE does handle a small percentage of
its trading electronically, but the vast majority of trading
is done on the stock exchange floor. The stock exchange floor
is the most common image in people’s minds when they think
of trading stocks. Within the chaos of hundreds of traders
shouting and making gestures, shares are being traded. The
process starts when the customer tells their broker to buy
50 shares of Company X at market. The broker then sends the
order to a clerk located on the exchange floor.
The clerk finds a trader on the floor and informs them of
the order. This trader then finds another trader who is willing
to sell 50 shares of Company X stock. All traders on the floor
are highly trained and know who is representing which brokerage
firm and what stocks are available for trade. Next, the two
floor traders agree on a price for the 50 shares and complete
the transaction. The floor clerk is informed, who in turn informs
the broker of the trade. The broker calls the customer back
and discloses the final price. In a few days, the customer
gets a confirmation by mail of the transaction. The
actual time of the stock trade can take only a few minutes.
While this is a relatively simple process for a single trade,
the practice can get a bit more complicated. There are more
complex trades that take place on the stock market floor involving
larger blocks of stocks. The fact that the New York Stock Exchange
market handles one billion shares of trading every day is a
marvel of modern times.
While the New York Stock Exchange is a person-based system,
the NASDAQ stock exchange is handled entirely electronically.
The NASDAQ system uses large computer networks to handle the
process of matching buyers and sellers. This is in contrast
to the NYSE’s process of using live brokers. The advantage
of the NASDAQ is that the system is efficient and fast. Large
institutional traders, like mutual funds and pension funds,
prefer trading with the computerized NASDAQ system.
When an individual investor uses the NASDAQ system, they get
almost instant confirmations on all trades. Some prefer this
method because it puts the investor in more control of the
investing removing the middle man and bringing them a step
closer to the market. With NASDAQ there is no need for the
floor clerk or floor trader, the computer system handles these
tasks. With NASDAQ, however, there is still a need for a broker.
Investors do not have access to the exchange market. The broker
accesses the electronic network and arranges the trading. They
login to the market to find the buyer or seller depending on
the customer’s order.
With
online investing, there are a variety of buy and sell
orders that the individual investor can take advantage of in
order to gain more control over the process. The most basic
orders are market orders, limit orders and stop loss orders.
A
market order is the simplest of these orders. It instructs
the broker to buy or sell the stock at the market price. These
are the most inexpensive orders since there aren’t many brokerage
fees for market orders.
Limit
orders are used to direct the broker to trade a stock
at a particular price. The transaction will not be carried
out until the requested stock reaches that price. The benefit
of using limit orders is that they allow the investor to control
their entry to and exit from the market. The one drawback is
that limit orders may have much higher brokerage fees than
market orders. An investor may be better off watching the market
and placing a market order when their stock reaches the desired
price.
Stop
loss orders live up to their names. They stop further
losses from occurring on stocks that are declining in price.
A stop loss order establishes a price trigger. At the point
that a stock reaches that price trigger, the brokerage will
sell the stock. A stop loss order can be seen as a form of
insurance to protect the investor from big drops in stock. # # # # # SolveYourProblem.com : 2007
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