Given this, how do US stock markets work? What makes them go
up and down? What type of securities can you invest in –
indeed, what are ‘securities’?
If you are contemplating investing in the US stock markets, while
you don’t need to know all the ins and outs of how to buy
and sell stock, you will need to know the basics of trading on
US stock exchanges.
Primary and Secondary Markets
The first thing to note about US securities issues is that a primary
and secondary market exists. Here, the primary market represents
issues that corporations make directly to the general public,
such as an Initial Public Offering (IPO), while the secondary
market deals with trade that are made between investors who wish
to buy and sell securities. Although the board of directors of
a corporation will always be interested in how their securities
are trading in the secondary market (e.g. stock exchange), as
this may have a major influence on the cost of their future borrowing,
never will a US corporation or government entity issue a securities
directly on to the secondary market (e.g. a stock exchange). In
all cases the corporation will issue the securities directly to
investors in the primary market, the securities are then listed
on an exchange, and investors start to trade among themselves
in the secondary market until such time as the maturity date of
the security arrives (if it ever does), at which time the issuing
corporation will ‘redeem’ the issued security.
How To Trade?
The first thing to note is that, despite what you may often hear,
you don’t actually ‘trade’ US stock, you buy
or sell them. The term ‘trade’ is actually brokers’
jargon of saying you are trading on the US stock exchanges.
How you buy or sell stock
You can buy or sell (execute a trade) stock on the US exchanges
either:
- on the exchange floor; or
- electronically
That said, on some exchanges you can either trade only on the
exchange floor, such as the futures’ market, or electronically,
such as on the NASDAQ, but not both.
Trading on the exchange floor
Although there may be slight variations to the method if the amounts
being traded are high in volume, a basic trade on the stock exchange
is executed as follows:
1. tell your broker to buy/sell the stock in question and which
market they are on
2. your broker sends the order to the clerk on the exchange floor
3. the clerk tells the floor trader who will look for a trader
who want an inverse of your order (for example, you want to sell,
the floor trader is looking for a buyer)
4. a price is agreed between the floor traders based on your sell
order and his buy order (or the other way round) and a deal is
done. The floor trader then tells the clerk the deal is done and
the clerk tells your broker, who’ll tell you the deal is
done and at what price the deal was done at. Although the process
may seem to be cumbersome, the whole process is done in a few
minutes.
Trading electronically
The modern alternative to trading on the exchange floor to trade
electronically. To support electronic trading, exchanges have
installed vast computer networks that match buy and sell orders.
With the unstoppable growth of the internet, some are starting
to wonder how long it can be before other exchanges follow the
lead of the NASDAQ and have a completely electronic trading system.
Over-the-counter
Many US corporations elect not to list their securities on any
exchange, preferring instead that their stock be traded in what
are known as over-the-counter markets. Over-the-counter markets
work very similar to stock exchanges such as the NYSE, but normally
deal with smaller-capped corporation. By and large, today, over-the-counter
buy and sell orders are executed electronically – and by
far the biggest over-the-counter stock market is the NASDAQ.
