Loosely defined, the stock market exchange is a physical as well as abstract location where trading facilities are provided to exchange securities. This means that brokers and traders can use this location to trade stocks or shares issued by corporations, derivatives, bonds, unit trusts and mutual funds. This article will give a brief over view of how this is accomplished.
When you go to your broker and tell him or her that you want to buy shares of stock in a particular company, that is usually where the conversation ends assuming you know what you are doing. However after you tell your broker this, they set in to motion a chain of events that is far more complicated than saying, “I’ll take 50 shares of XYZ company.”
After you leave your broker’s office a call has already been on its way to your brokerage firm’s order department. From there that responsible department sends your order to the brokerage’s clerk on the trading floor of a stock exchange. This is the floor that you may have seen on the news where a chaotic group of people in different color coats are running around frantically waving their arms. Although this scene may look disorganized, it is an efficient and methodical environment. The clerk who has your order for 50 shares of XYZ gives it to the floor trader working on the exchange floor as well. This person finds a specialist’s post for XYZ to locate another trader who wants to sell shares of XYZ. A price is negotiated and the trade is executed. The trade is then confirmed backwards through the original path from the floor to the broker and finally to you.
The process just described is one of few ways that average consumers can buy and sell shares of stock. The mention of brokers is important because most trades in today’s market originate from a stock broker. These professionals must be licensed to act as agents for buyers and sellers of securities and are held to rigorous regulatory and legal standards by the SEC (Securities and Exchange Commission). The average person cannot just set up a business and decide to offer shares of stock for sale to raise money. Stock valuation, detailed financial reports, liquidity and market value are all factors taken into account before a company can issue an IPO or initial public offering. There are major stock exchanges such as the NYSE and NASDQ however several smaller regional exchanges offer shares of stock from smaller companies.
