Stock Market Trading is the process of buying and selling of company stocks or shares through stock exchanges. It is also known as Equity Trading. A stock market is a market where securities like company stock and derivatives of company stock are traded. These securities are listed on a Stock Exchange.
The stock market can be categorized into two parts:
The Primary Market: The primary market deals with offering of new issues (Initial Public Offers or IPOs).
The Secondary Market: The secondary market deals with subsequent trading of the shares after the IPO is made. There is no involvement of the issuing company. When people talk about stock markets, they refer to the secondary market.
There is a wide range of investors in the stock market from small individual stock investors to large hedge fund traders coming from different locations. They place their orders to a professional in the stock exchange who is responsible for executing the order.
Some exchanges are physical locations where the transactions are executed on a trading floor. The method used in this kind of transactions is called open outcry. Only those stock exchanges and commodity exchanges use this type of auction where traders can simultaneously place verbal bids and offers.
Another type of exchange is there which is a virtual kind of exchange. This exchange is made up of a computer network. In this type of exchanges, trading is done electronically through traders at computer terminals.
The actual trade is based on the auction market model where a potential buyer bids a particular price for a stock and a potential seller asks for a particular price of the stock. Buying or selling at stock market means acceptance of any bid price or ask price of the stock. When bid and ask prices tally, the stock is sold. If there are many bidders or askers at a given price, the sale is done on a first come first served basis.
The stock exchange facilitates the exchange of securities between buyers and sellers and it works either as a virtual marketplace or a real marketplace.
The New York Stock Exchange (NYSE) is an example of physical exchange. Here a large portion of the trading is executed face-to-face on a trading floor. This is also a listed exchange because only the stocks that are listed with the exchange can be traded. Orders are placed through brokerage firms who are members of that exchange and they pass down to the floor brokers. The floor brokers gather near a particular spot on the floor where the stock is traded. This location is called the trading post. There is a person who is present at the trading post and he is known as the specialist. He matches the buying orders with the selling orders. The auction method used for determination of prices is open outcry method.
The NASDAQ is an example of a virtual (listed) exchange. It is an over-the-counter (OTC) market. Here a computer network carries out the total trading operation. The procedure of trading is the same as the NYSE, but here the sellers and buyers are matched electronically.
The Paris Bourse is an electronic and order-driven stock exchange. It has become a part of Euronext. It was an open outcry exchange, but it was converted into an automated exchange in the late 1980s.
The market makers in major stock exchanges assist to limit the price variation or volatility as they buy and sell a particular company's shares on behalf of their own and on behalf of others also.
Nowadays, active trading is fading out from the active exchanges because of the Securities Firms like UBS AG, Goldman Sachs Group Inc., and Credit Suisse Group. They trade securities through their internal systems away from the stock exchanges.
Therefore, the nature of Stock Market Trading is changing day by day.