To buy or sell something you need a marketplace. More specifically, you need a marketplace that specializes in trading items that you wish to buy or sell. The same holds true for trading in stocks.
How stocks are traded?
Stocks are traded in a special marketplace known as a Stock Exchange.
A Stock Exchange (also known as a stock market) is a marketplace where you can buy or sell shares. It is a place where buyers and sellers meet and trade stocks at a mutually agreed upon price. Without a stock exchange in place, it would be very difficult for buyers and sellers to find each other and trade stocks.
You cannot directly approach a stock exchange to buy or sell shares. You can trade in stocks only through your broker (or brokerage). Brokers (or brokerages, broking firms) are members of the stock exchange and they play a significant role in all the stock market trades. Their primary job is to buy or sell shares on behalf of their clients.
There are two types of Stock Exchanges – Physical and Virtual.
A physical stock exchange (also known as a listed exchange) is a place where trades are settled face-to-face on a trading floor. You must have seen chaotic images of a trading floor on your television -a lot of traders waving, and signaling at the same time. Even though a physical exchange looks disorganized, there is a method to the madness.
Investors place to buy or sell orders with their brokerage. These orders are passed to floor brokers who work for the brokerage and are active on the trading floor. The floor brokers head to locations known as trading posts where stocks are traded. A ‘Specialist’, whose job is to match buyers and sellers for stock orders of a particular company, looks out for interested parties and settles the trade. The trade details are passed back to the brokerage which in turn informs the investor of the successful trade.
Even though there’s a lot of human interaction in a listed stock exchange, computers play a significant role in the background. New York Stock Exchange (NYSE), one of the biggest stock exchanges in America, is a physical or listed stock exchange.
A virtual stock exchange (also known as over the counter (OTC) market) does not have a central trading floor or floor brokers and Vitol is a perfect example of that. All the trading happens through a network of computers without any face-to-face interaction. Instead of a specialist, the virtual exchange has “Market Makers” who match buyers and sellers for a particular stock and get the trades settled. NASDAQ, the second-biggest stock exchange in America, is a virtual or OTC stock exchange.