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Last Updated: Feb 18th, 2008 - 14:39:01 |
Basics of Stock Trading [622 words]
To “trade” is to buy and sell, according to the terminology of the financial markets. Stock trading involves buying and selling of millions of shares all over the world. It is a mystery how this large a volume and value of trade is accommodated in the system of trading. These financial markets are marvels of technological capacity.
If you're looking to invest in stocks, it is necessary that you have at least a basic understanding of how the market works. You don’t have to know all of the technicalities of buying and selling stocks. Explaining the technical aspects of the markets is possible by tracing the appropriate links available in the web. The first and foremost necessity is to know how the exchange floor works, no matter whether you trade through the floor or electronically.
On the exchange floor, when the market opens, hundreds of people are seen rushing about shouting and signaling to one another, watching monitors, and entering data into terminals, talking on cell-phones. It looks like a complete fiasco.
However as the day draws to its end, the markets have successfully worked out all trade and are prepared for the next day. Here is a step-by-step presentation of the execution of a simple trade on the exchange floor of any major stock exchange.
a) You ask your broker to buy certain number of shares of a company at market.
b) The broker’s order department passes the order on to their floor clerk on the exchange.
c) The floor clerk transfers it to one of the firm’s floor traders who finds another floor trader wanting to sell this many shares of the company you wanted. The floor trader knows which floor traders transact in particular stocks.
d) The two converge on a price and complete the deal. The notification process travels backward along the line and your broker gets back to you with the final price. A few days later, you will receive the confirmation notice in the mail.
In electronic markets vast computer networks often reduce the work of human brokers in matching buyers and sellers. It lacks the charged up scenes of the bustling floors of busy stock exchanges, but it is efficient and fast. Quite a few institutional traders, mutual funds, pension funds, and the likes, prefer this method of trading.
As an individual investor, you can get almost instant confirmations on your trades at very low costs. It also helps you keep a tab on online investing by taking you closer to the market by one step.
Yet, a broker is still needed to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.
You then will need to infer the price behavior of stocks. Price is the immediate cost of a share. And this behavior is so uncertain that it keeps everybody in the game quite excited. This is what generates the profits or losses that are made by investing in this market.
Don’t worry if you find it very difficult to infer the price, because it really is difficult. They frequently fluctuate all along the day. And there is no guarantee that in the morning a price will start at the point where it was at the end of the previous day, though it usually starts in the neighborhood.
Yet there are patterns to be figured out, and expectations often work. Depend on your intelligence and on a professional broker, and never stop short of understanding fully what caused a bad result when it occurs. Learn the practical lessons from your experience, record them in writing, and consult them whenever necessary.
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