Stock Trading Mechanism
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.
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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. 5 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 canceled. Limit orders typically cost more than market orders. Despite this, limit orders are beneficial because when the trade goes through, investors get the specified purchase or sell price. Limit orders are especially useful on a low-volume or highly volatile stock.
The bid-ask spread is the amount by which the ask price exceed the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. A block order is when a significant order placed for sale or purchase or a large number of securities. Whenever there is a block order, there may not be enough buyers to absorb all these shares. That means the price of the stock must drop, so more buyers can enter the market.
In this case, a market specialist may be called upon to assist a block the trade. They will buy up large blocks of the shares themselves, hold them for a short period of time and then sell them as new buyers come to the market. The specialist responsibilities whenever the stock market is booming or slumping is that they will step in and sell out of their inventory to meet the demand until the gap has been narrowed. Specialists are also responsible for managing large movements by trading out of their own inventory. For the most part, this is what is involved in stock trading.