How Stock Markets Work

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Stock exchanges perform the role of fully fledged securities marketplaces by enabling individuals and companies to conduct their stock trading activities on a centralized platform. The transactions undertaken can involve company stock or derivatives, and the market worth of these financial instruments runs into trillions of dollars.

Due to the highly technical nature of this domain, many ordinary individuals resort to using the experience of stock brokers to handle their stock trading activities. The nature of derivatives is such that they offset each other, which can be best illustrated by saying a parallel bet on a particular development is canceled by a parallel derivative bet on a non-event.

Hence the value of this kind of securities is based on notional value or market to model compared to a stock which is based on the actual price. Stock listings allow stock traders to keep tabs with the market developments.

Trading can also be carried out remotely by monitoring and taking positions or placing orders online, some of the participants are large hedge fund traders who bring along huge amounts of money.

The trading activities that take place on these exchanges work on an auction market model, buyers place bids for a given stock and the actual sale goes through when the bid and the ask price match. The advantage of stock exchanges is that they enhance the capacity for price discovery.

And some of the best examples of stock exchange trading floors are the Paris Bourse, Tokyo Stock Exchange, Johannesburg Stock Exchange, London Stock Exchange, Toronto Stock Exchange, Bombay Stock Exchange and the Hong Kong Stock Exchange. Transactions on the trading floors entail the outcry method which is commonly used to place bids and offers.

The orders are passed to the floor broker who handles the onward transmission responsibilities by forwarding them to the specialist who in turn matches the alternating orders using the same method.

The brokerage firm only receives feed back when the trade is complete, and the details are noted on tape. While technology is utilized to conduct program trading, and exchanges such as the NASDAQ are virtually computerized.

The outcry method is therefore unsuitable and made redundant because buy and sell orders are matched electronically. However, stock exchanges are not the only platforms or trading securities since firms such as Goldman Sachs Group, Credit Suisse and UBS which are securities orientated, and also conduct internal trading.

Organizations that use these firms enjoy anonymity which comes with such platforms, and they are usually fairly large in terms of blocks of stocks.



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