The main characteristics of exchange markets can be classified into:

1. Exchange Membership
In the U.S., the listed securities exchanges classify memberships as:

  • Specialists: Specialists are the market makers for stocks, controlling the limit book and posting bid and ask prices.
  • Commission Brokers: Commission brokers are employees of a firm that is a member of the exchange. The commission broker buys and sells shares for the clients of its firm.
  • Floor Brokers: Floor brokers function much like commission brokers buying and selling shares. Unlike commission brokers who are employees of member firms however, floor brokers are independent and aid commission brokers when they become too busy.
  • Registered Traders: Registered traders are members that buy and sell for their own account. They help to provide liquidity. Because they are independent, however, the exchange places limits on how they trade.
 
2. Types of Orders
An order on an exchange can be classified as follows:
  • Market Order: A market order is a basic order to buy or sell a security at the best available price. For example, a client places an order to buy 100 shares of Newco; the client expects/wants the best available price for buying those shares.
  • Limit Order: A limit order places a specific price at which a transaction is executed. These orders typically have a set time horizon in which the limit order can be executed. For example, Newco's stock is trading at $50. A client places a buy limit order to purchase shares at $45. The transaction will thus be executed when the shares reach $45, if they do. Otherwise, the order will expire in the allotted time.
  • Short Sale Order: A short sale order is an order to sell shares that a client does not own. As a result, the trader must borrow the stock, sell it, and then buy the stock again to replace the shares he borrowed. For example, a client wants to sell 100 shares of Newco short at $45. The trader must borrow 100 shares, sell the 100 shares and then purchases the shares to replace the ones he borrowed. A client may do this if he believes shares of the respective company will decline below the price at which the shares were sold short.
  • Stop Loss Orders: Stop loss orders are placed in order to prevent losses on shares below a specified share price. For example, an investor bought shares of Newco at $50. The shares appreciated to $100. The investor is interested in protecting some profit on the shares of Newco in case the price starts declining. This investor may place a stop loss order on the shares of Newco at $80. If Newco's shares decline to $80, the stop loss order would be executed, protecting some of the investor's profit. Whether you use this strategy for your own or for a client's portfolio, stop loss orders are essentially a simple but powerful tool to help implement a stock-investment strategy. Find out more in the article called The Stop-Loss Order, Make Sure You Use It
 
3. Market Makers
Market makers facilitate the trading in a stock, buying and selling stock from their own accounts in order to maintain orderly trading and provide liquidity in a stock if it is needed. Additionally, the market maker manages the limit order book where both limit and stop orders are recorded. In the U.S. exchanges, the market maker is known as a specialist.
 


Short Selling

Related Articles
  1. Trading

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  2. Trading

    The Basics Of Trading A Stock

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
  3. Trading

    High-Frequency Trading: A Primer

    An in depth look at how high-frequency trading works and who the players are.
  4. Investing

    Stop Loss Order Strategy

    A stop loss order is an order placed with a broker to sell a stock immediately if it drops to a certain price. It's a common way for investors to protect themselves from the possibility of a ...
  5. Trading

    Which Order To Use? Stop-Loss Or Stop-Limit Orders

    Stop-loss and stop-limit orders can provide different types of protection for investors seeking to lock in profits or limit losses. Investors need to know how each type of order works to know ...
  6. Investing

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center