How does the stock market work?
March 7, 2009 | In: Share Market
The stock market comprises of two types of markets: the primary market and the secondary market. In the primary market, issuers sell securities with listing them as one of the objectives of the issue. A company which wishes to list its shares on the stock exchange must offer shares to the public through the primary market. In the secondary market, securities that are already listed on the stock exchange are bought and sold. When one looks at the television screen, the stock market may appear to be a chaotic place with traders shouting and vigorously gesticulating on the trading floor. In reality, it is a highly organized market.
The trading process
Stock market trading is influenced by the forces of demand and supply. An order placed by a buyer to purchase a stock must be matched by a sellers order to sell. The trading process is more like an auction. When an order is placed, a member approaches the trading floor and presents the order. In the trading floor, if there is a broker who is selling the same stock at the same price or price range as that of the buyer’s broker, the order gets filled. Brokers need to be nimble footed to avoid the risk of missing the market.
A slight hesitation on the part of the broker could see a competitive bid being placed driving the market price up for the next trade. If the buyer broker fails to find a corresponding seller broker, he approaches a specialist who is required to sell the shares. A specialist also buys shares. Thus, specialists guarantee that the market operates in an orderly fashion. From this point on, the specialist is in charge of the order. If a GTC order is placed, it will remain open until it is filled or is cancelled or until the last day of the next calendar month.
Once an order is filled, it is reported to the Market Data System of the exchange. The system then transmits the trade details including the stock name, the number of shares traded and the price of the trade to all interested parties through the ticker tape. The system sends the trade tickets to both the sellers as well as the buyer’s brokerage firm. The brokers make sure the trade matches. If it does not they meet again to settle the differences. This, however, does not affect the fill. Once agreement is reached, the settlement process begins. Settlement occurs within three days from the trade date. Upon settlement the brokerage firms exchange, usually electronically, the underlying stock certificates and the money for the trade.
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