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.

RELATED FAQS

  1. What are some examples of Cash Flow from Financing (CFF)?

    Learn about examples of cash flow from financing, such as how companies fund their operations and how it is reflected in ...
  2. Can retail investors buy commercial paper?

    Find out whether retail investors buy commercial paper, and learn about the restrictions that often prevent individual investors ...
  3. What are the best technical indicators to complement the Haurlan Index?

    Discover which technical indicators make the best complements to the Haurlan index, a market breadth tool designed to identify ...
  4. What is the Austrian Theory of the Business Cycle?

    Read about the Austrian business cycle theory, which claims that government interventions in the credit market lead to asset ...
RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...
  3. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  4. Capital Strike

    A refusal of businesses to invest in a particular sector of the ...
  5. Gray Market

    An unofficial market where securities are traded. Gray (or “grey”) ...
  6. Floating Stock

    The number of shares available for trading of a particular stock.

You May Also Like

Related Articles
  1. Fundamental Analysis

    What are some examples of Cash Flow ...

  2. Mutual Funds & ETFs

    Which ETF is the Best Bet: VTI or IWV?

  3. Options & Futures

    Options -- Accessing Stakes In Apple ...

  4. Trading Strategies

    Risk Management Techniques For Shorting ...

  5. Stock Analysis

    How Nasdaq Continues To Innovate

Trading Center