When executing a trade on the stock exchange, most transactions for private investors are accomplished through a brokerage firm. Individuals and organizations that wish to purchase securities will call upon the brokerage firm to execute their transaction.
In an example of a trade, an investor wanting to buy 200 shares of ABC Corp stock will telephone or e-mail the order to a brokerage. This communication is normally made to a stockbroker.
The investor might desire to buy the shares at the market, or current price. However, the investor may choose to pay no more than a set amount per share. The brokerage firm then contacts one of it's brokers at the stock exchange to purchase the order.
For this service, the investor will pay the original broker a commission, either as a flat fee or as a percentage of the purchase price.
The price of a stock depends upon the market forces of supply and demand. With companies issuing only a limited number of shares, price is determined by demand. An increase in demand will raise the price whereas a decrease in demand will lower the price.
Generally the demand for a particular stock depends upon expectations relating to the profits of the corporation that issued the stock. The more optimistic these expectations are, the greater the demand will be and, therefore, the higher the price of the stock.
Second by second
For the more sophisticated private investor there are online services that enable trades to happen in the moment without the need for a broker in the traditional sense. Typically these services are known as 'Level 2' because they offer a higher level of technical information than most private investors would need. This is the type of technology being used by day traders, for example.
These levels of service are also able to show the trades ready and waiting to be filled. This is the kind of information that can give traders a Machiavellian edge in this brutal game.
Block by block
Clearly, the big investment houses and funds tend to operate on a different scale to the rest of us. When it comes to buying and selling shares, they will often deal in bulk, moving tens or hundreds of thousands of shares at a time.
As an investor, share buybacks offer an opportunity to glimpse this world. In the annual accounts, if company stock has been repurchased, it will usually be listed in the document somewhere. Big companies will typically be buying their own stock from pension funds and investment banks to boost their own earnings per share and therefore, share value. Those trades will generally be listed with a date and time of the transaction, the total value transacted and the total number of shares. The amounts can be staggering.
There are some companies that specialise in enabling these kinds of trade. For a number of years, Goldman Sachs was one of the largest block traders in the United States and built much of their business on it's foundation.
With such large transactions between market participants, the urge to remove commissions is strong. Therefore, many of these large trades are conducted direct without any brokers in between. These trades are known as dark pools since they happen away from the light of the main market. Since the 2008 financial crash, regulators in America and Europe have been grappling to find ways to limit these kinds of transaction as they are almost impossible to regulate and offer the potential for structural weaknesses to occur in the system.
To read more, please follow these links:
What Is A Stock Exchange And What Does It Do?
What Is An Efficient Capital Market?
The Stock Exchange And National Economies
Investment Institutions And The Stock Exchange
Why Are There So Many Stock Exchange Scandals?
Stock Exchange Regulations - The Sarbanes Oxley Act
Investment In The Stock Exchange
Learn About The Important Role Of Stock Rating Agencies
How Big Should Stock Market Bonuses Be?