A Brief Overview of How Stock Trading Works
How Stock Trading Works
Although the stock market has been around for so many decades, people still have the wrong notions of some parts of its operation.
Today, I am going to give you a brief overview of how stock trading works.
It All Starts with the Shares
Before even thinking about buying or selling stocks, I want to talk about how they came to be. The stocks or shares that you can buy or sell comes from a company or any of the stock trading firm in Malaysia.
This is usually done by completing an Initial Public Offering or an IPO. The purpose of doing this is to raise some capital that the company can use to invest for better organizational growth.
The shares (or stocks) is an intangible thing that gives a trader part ownership of the company. Heck, if you’ve bought a plenty of stocks from a particular organization, you might even be reserved a seat in the company’s board.
The Two Traders
Before I start, I want to preface this by saying that the “traders”, in this context, refers to both buyers and sellers of stocks.
With that being said, there are actually two types of traders in the share market. One trader engages in High-Frequency trading (they are also known as the “Active” traders) where they buy or sell their shares regularly; often in just a matter of days.
On the other end of the spectrum, there are also the more “passive” ones which are also referred to as the Buy-and-Hold investors.
They hold on to their shares for extended periods of time (we’re talking about years here) and they are more concerned about long-term investments as opposed to frequent trades.
Liquidity and Modernization
Back in the day, all of the trades are conducted inside the stock exchanges. Did you see movies that depict what usually happens inside these exchanges? It is chaotic, to say the least.
That is why there is now a push for modernization. In fact, a sizable portion of the trading public is now using their computers for electronic trade.
Due to the new developments in technology, the stock market has been more liquid than ever before. In other words, there are more trades being conducted on a daily basis thanks to the ease and convenience an online trading platform can bring.
It is Similar to a Common Market
The stock market, in essence, is really like your common market in the sense that the same factors that govern the latter are also being followed by the former.
For instance, the share market also follows the law of supply and demand. A seller of stocks will find suitable buyers by letting them make an offer. The buyer, in turn, will make an initial bid which they can also change later as a counter bid against other potential buyers.
Once the buyer and the sellers agree on the price, then a trade can be made. Once that is done, a note or confirmation will be delivered to both parties that gives them the complete information about the trade that just happened.
In essence, the stock market is just like your common market where there are a buyer and a seller of shares. A trade is made once both parties agree on a price. Transactions can be made either on the stock exchange floor or by using an online trading platform.