Trading Basics

Posted by Pierre de la Fortune on December 09, 2015 @ 12:01 a.m.

Written by Ken Little

Trading stocks. You hear that phrase all the time, although it really is wrong Ė you donít trade stocks like baseball cards (Iíll trade you 100 IBMs for 100 Intels).

Trade = Buy or Sell

To ďtradeĒ 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 my order of 100,000 shares of MegaCorp.

You donít 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. If you want to dig deeper, there are links to articles explaining the technical side of the markets.

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 NASDAQ, trade stocks electronically. The futuresí markets trade in person on the floor of several exchanges, but thatís a different topic.

Exchange floor

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. Here is a step-by-step walk through the execution of a simple trade on the NYSE.

1. You tell your broker to buy 100 shares of Acme Kumquats at market. 2. Your brokerís order department sends the order to their floor clerk on the exchange. 3. The floor clerk alerts one of the firmís 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. 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.


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.

You still need a broker to handle your trades Ė individuals donít have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.


What does this all mean to you? If the system works, and it does most of the time, all of this will be hidden from you, however if something goes wrong itís important to have an idea of whatís going on behind the scenes.

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Upgrade and trade. Ben

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Money Blitz Word of the Day

Option: The right to buy or sell a security at a given price within a given time. The right to buy the security is called a "call." Calls are bought by investors who expect the price of the stock to rise. The right to sell a stock is called a "put. " Puts are purchased by investors who expect the price of the stock to fall. Investors use puts and calls to bet on the direction of price movements without actually having to buy or sell the stock. One option represents 100 shares and sells for a fraction of the price of the shares themselves. As the time approaches for the option to expire, its price will move up or down depending on the movement of the stock price.

Money Blitz Quote of the Day

Boiler Room (2000) ďThere's an important phrase that we use here, and think it's time that you all learned it. Act as if. You understand what that means? Act as if you are the fucking President of this firm. Act as if you got a 9" cock. Okay? Act as if.Ē -Jim Young

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