What exactly is being done when shares are bought and sold?

By Jean Folger AAA
A:

Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange where some trades are placed manually on a trading floor (other trading activity is conducted electronically). NASDAQ, on the other hand, is a fully electronic exchange where all trading activity occurs over an extensive computer network, matching investors from around the world to each other at the blink of an eye.

Investors and traders submit orders to buy and sell stock shares, either through a broker or by using an online order entry interface (i.e., a trading platform such as E*Trade). A buyer bids to purchase shares at a specified price (or at the best available price) and a seller asks to sell the stock at a specified price (or at the best available price). When a bid and an ask match, a transaction occurs and both orders will be filled. In a very liquid market, the orders will be filled almost instantaneously. In a thinly traded market, however, the order may not be filled quickly or at all.

At a physical exchange, such as the NYSE, orders are sent to a floor broker who, in turn, brings the order to a specialist for that particular stock. The specialist facilitates the trading of a given stock and maintains a fair and orderly market. If necessary, the specialist will use his or her own inventory to meet the demands of the trade orders.

On an electronic exchange, such as NASDAQ, buyers and sellers are matched electronically. Market makers (similar in function to the specialists at the physical exchanges) provide bid and ask prices, facilitate trading in a certain security, match buy and sell orders, and use their own inventory of shares, if necessary.

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