When we talk about trading in the stock markets, it is the same thing and uses the same principle.
Let me give an example from the share market.
Say someone is doing a trade in shares of a listed company. What he/she is actually doing is buying shares (or a small part) of the listed company.
So, if the value of those shares increases, then he/she will make money by selling them again at a higher price. This is trading in the share market.
You buy something for one price and sell it again for another (hopefully at a higher price), thus making a profit on trading and vice versa.
Trading in stocks can be financially rewarding if done in the right way. It involves riding the various ups and downs of the stock market.
Now, let’s look into the various ways to trade in the stock market.
Methods of trading
There are two basic methods of trading in the stock market.
1. Trading on the exchange floor
Trading on the exchange floor of the Bombay Stock Exchange (BSE) is the image most people have, thanks to television, especially old movies depictions of how the stock market works.
In the stock market, this method of trading was used by all the stock exchanges till the introduction of an electronic method in 1992 by the National Stock Exchange (NSE).
Before 1992, around the world, when the stock market opens in the morning, hundreds of people used to rush about, shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals which looks like chaos in a room full of traders.
At the end of the trading day, the exchange floor calms down, but it took up to 3 more trading days for a trade to settle, depending on the type of financial product.
Here is the step-by-step methodology of the execution of a simple exchange floor trade used to happen in stock market before 1992.
Step #1: Trader tell his/her, broker, to buy 100 shares of Company X at the stock market.
Step #2: Broker’s order department sends the order to its floor clerk on the stock exchange.
Step #3: The floor clerk alerts one of the company’s floor traders, who finds another floor trader willing to sell 100 shares of Company X.
This is easier than it sounds because the exchange floor trader knows which floor traders make markets in particular stocks.
Step #4: Finally, the two agree on a price and complete the trade deal and broker calls the trader back with the final price.
This process used to take a few minutes or longer depending on the stock and the market situation. After few days, traders receive the confirmation notice in the mail.
Note: Above is this example was a simple exchange floor trades, complex stock trades and large blocks of stocks involve considerably more details in the trading process.
2. Trading Electronically
NSE is the youngest stock exchange of which came into the picture in the year 1992.
It made a great impact on the stock market by becoming the first exchange to provide the latest, modern, fully automated, screen-based electronic trading system.
NSE offered an easy trading facility to the investors spread across the length and breadth of the countries.
In the year 1995, there was a strong push to move more trading to the networks and off the trading floors. But this push was been met with some resistance from the regional and smaller stock exchanges .
The most notable and popular stock exchange market i.e., BSE adapts electronic trade with the commissioning of Online Trading System (BOLT).
The electronic trading markets use large computer networks to match buyers and sellers, rather than human brokers.
While this system lacks the romantic and exciting images of the BSE floor, it is efficient, reliable and faster.
For an individual trader or investor, you frequently can get almost instant confirmations on your trades, if that is important to you.
However, it is important to know that, you still need a stockbroker to handle your trade-in stock. Individuals don’t have access to the electronic markets.
The stockbroker accesses the exchange network for you, and the system finds a buyer or seller depending on your order.
But now the question arises – how trading happens stock market and why does the price of stocks fluctuate?
What is online trading?
Online trading involves the trading of stocks through an online platform that facilitates the trading of various financial products such as shares, mutual funds, commodities, etc.
In the 21st century, trading on stocks has become as simple as shopping of products online. Anyone can do trade by sitting in a coffee shop using their smartphone.
All it needs is good internet, subscription to 3-in-1 account, a mobile banking app and sufficient money in the bank account.