A Stock Trade: How it Works

Details of a stock trade

What actually happens when you make a stock trade? That question would have been easier to answer in the days of Jesse Livermore, author of “Reminiscences of a Stock Trader”. In that classic from the 1930s he describes the atmosphere in the “bucket shops” in which traders would watch prices move on a ticker tape and, when they wanted to buy, they would find somebody who was willing to take their money (or issue an I.O.U.) and guarantee that the trade would go through.

How a Stock Trade Works Today

  1. A buyer indicates that they want to purchase a stock at a specific price (limit order) or at the current price (market order).
  2. The order is electronically matched with a willing seller of the same stock.
  3. Both accounts are adjusted to reflect the transaction. Money goes out of the buyer’s account and the new stock goes in. The opposite is true of the seller’s account.
  4. There is a transition period (generally three business days) before the transaction 'settles’.
  5. Now the stock is available to trade in the new owner’s account and the sale price (less commission) is available in the seller’s account.

In today’s world, a stock trade is more seamless and at the same time less reliable. An “old school” investor will call his or her broker and instruct the broker to buy or sell a stock either at market price (the price where the stock is trading when the order is processed) or at a specific price lower than the current price. The more active investor will go on the website of their broker and enter the same information directly. And the active trader, using the strategies taught at Online Trading Academy, will have his or her professional workstation with Level II quotes that interact directly with the markets and have zero delay in their processing.

Electronic trading has dramatically reduced the commissions for most people, and has leveled the playing field somewhat because once an order is entered, it is processed fairly quickly. But it sometimes happens that high frequency trades get filled first or a broker manually entering orders will pay more attention to high-value, high-volume accounts than to the individual with a few shares to buy or sell. Also, if you’re on a Level II platform watching real time stock trade activity, you may see “phantom trades” in which a large institutional trader enters a bid at a price far off the current market, not expecting it to be filled but simply wanting to “bluff” the market using the same principles as in poker.

What hasn’t changed in the stock trade is the underlying dependence on the eternal law of supply and demand. When there are more willing buyers than willing sellers, price will go up. If you are one of those willing buyers, you will have to enter an offer price higher than the current price or your order will not be filled. The reverse is true when you’re trying to sell a downward trending stock.

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