How Are Stocks Traded?

Trading stocks today is far simpler than it has ever been, even more so than the last few decades. Today, trading stock is as simple as matching stock quotes between buyers and sellers. Electronic trading has allowed traders to match up their buy and sell orders to make stock quotes tighter and ultimately favor the trader. In the past, buying and selling stock was limited to trading paper certificates and paper currency. Today, the swap between online trading balance and shares of stock is simple; type in the stock symbol, and you are presented with the stock of your choosing at a generally accepted stock price.

The Importance of Stock Exchanges

Stock exchanges in the United States, including the New York Stock Exchange, NASDAQ and American Stock Exchange all deal with large and small corporations. Stock exchanges are simply a central marketplace where buyers and sellers can meet to deal in one commodity: the stock of the world's corporations. The members on the floor of the exchange are privileged and have all paid over a million dollars each just to get on the floor. Floor traders are given the tightest of spreads and make money by brokering stock to the millions of traders without floor access. When you pay commission to place trades, a small portion pays all the members of the exchange who help make your order happen.

Fully Electronic Trades

On the NASDAQ exchange, stocks trade a bit differently. Using computers rather than human market makers, the computer systems pair up buyers and sellers at an agreed stock price or current stock quote. The NASDAQ market place requires no market makers; instead each transaction is placed by a computer. This is advantageous to traders, as the computer models aren't out to make money through the spreads like a human market maker.  In contrast, the NASDAQ is more interested in giving quality orders and expanding its customer base.

When the Stock Markets Were Young

Long ago, when the stock markets were just born, placing a trade was as simple as gathering under a tree to swap ownership in a likely local company for either another company or cold hard cash. Today, the exchange is far more complex, which ironically makes each trade simpler. Digits on a computer screen are traded for stock that is essentially virtual; your ownership is tied up in digits on the screen. When you conduct stock trading today, although you still take delivery of shares, very few of buyers actually take delivery of the stock certificates themselves.

Stock Certificates Have Gone by the Wayside

Its very rare to see investors pile up stock certificates unless they are looking for collectors items. Today, many people buy just a few shares of stock and ask for the stock certificates just for a collection. Day traders and electronic traders very rarely get the stock certificates themselves, as these are instead held at the brokerage firm or not assigned at all. With all the rapid day trading happening today, it would by inefficient to produce and send new stock certificates each time the stock is traded.