Stock Trading Mechanism

Topics: Stock market, Stock, Stock broker Pages: 2 (608 words) Published: August 2, 2011
For the people who wanted to understand the stock trading mechanism. The trading mechanism exists because of the need to channel money from investors into business entities. The combination of investors and borrows creates the market for securities. The trading mechanism refines the market by matching buyers and sellers with the prices they are will to pay or take.

The way how the system works are handled by brokers, dealers, and specialists. A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. Generally, it’s someone who acts as a middleman for an investor. The broker accepts the investment intentions of the investor and then acts in the market for the investor. The broker takes an order for a certain number of shares of stock, tells the investor what the current market for that stock is, and then buys or sells the stock. A dealer executes trade for his/her firm’s own account. Securities bought for the firm’s own account may be sold to clients or other firms, or become a part of the firm’s holdings. A specialist is a stock exchange member who makes a market for certain exchange-traded securities, maintaining an inventory of those securities and standing ready to buy and sell shares as necessary to maintain an orderly market for those shares. Market orders are buy or sell orders that are to be executed immediately at the current market prices. For example, our investor might call her broker and ask for the prices of Apple. The broker might report back that the best bid price is $90 and the best ask price is $90.05, meaning that the investor would need to pay $90.05 to purchase a share, and could receive $90 a share if he/she wished to sell some of her own holdings of Apple. A limit buy order is an order specifying a price at which an investor is willing to buy or sell a security. Limit orders also allow an investor to limit the length of time an order can be outstanding before being...
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