Stock Market 101

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Stock markets are open to the public and are used to by individuals to trade stocks and derivatives of companies. When we compare the Stock and Forex market to each other you will see that it is much more difficult to participate in the stock exchange market because you need a high starting capital and various connections to enter this market. (There are however some forex brokers that offer stock trades)

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In late 2020, the world stock exchange market had an estimated worth of more than $90 trillion, despite the coronavirus pandemic. The world-wide derivatives market has been valued at around $791 trillion in named or face value. This amount this is 11 times larger than the entire world economy. You cannot make a compare a fixed income with stocks. This is due to the fact that the value of derivatives are displayed as concept values.

Also, many derivatives are written over each other (e.g. A derivative that places a ‘bet’ on an occurring event may be overwritten by a derivative bet, which is placed on a non-occurring event.)

A lot of non-liquid securities are given a model marking and are valued as such, instead of a real market value.

Stocks are displayed and traded via stock exchanges. The stock exchange market can easily be compared to the system that your Forex broker uses. Stock exchanges are part of an organization or cooperation that has experience with gathering sellers and buyers and guiding them to the stock listings and securities. In the United States, the stock exchange markets trade a lot of securities. Stock exchanges include the NYSE, Euronext, the Amex and the NASDAQ and other regional exchanges such as Pink Sheets and OTCBB. European stock exchanges that trade in securities include the Deutsche Börse and the London Stock Exchange.

Trading stocks

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There are various types of people that participate in the stock exchange market, from the smaller private individual investors to the larger hedge funds traders. Traders can be based at any location. Usually a stock exchange professional will take and carry out a traders’ order.

At various stock exchanges it is possible to trade physically at an actual location. This method of trading is called ‘open outcry’. This method is available for commodity exchanges as well as stock exchanges; the traders have the opportunity to participate in ‘verbal’ bidding. The other type of exchange is known as “Virtual” exchange. Trades are made electronically using a computer network that does the trading for the traders.

An auction market has tangible trades: a buyer bids on a stock and a seller will ask a certain amount for that stock. (If you buy or sell at an auction market, you agree to selling/buying a stock for the amount stated) A sale will only be finalized when the bidding and asking price match. If there are a number of people bidding or asking at the same price, then the first people will receive first refusal.

A stock exchange assists sellers and buyers in exchanging securities: it offers a commercial place (real and virtual). Also, information on real-time trading of the displayed securities and price trends are all provided by the stock exchange. A stock exchange is very much a like a Forex trading system.

One famous and listed stock exchange that allows physical exchange is The New York Stock Exchange. You can only trade stocks that are actually listed at the Exchange. Stock exchange members may place orders and said order will be carried out by a broker on the trading floor. The floor broker goes to the specialist of the floor trading post for the particular stock and then trades the order. Using the ‘open outcry’ method the specialist is there to pair buy and sell orders.

A trade

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A trade will not take place straight away if a spread is present – in this case the specialist will use his/her resources (by means of stock or money) to close the gap after his/her time has elapsed.

When a trade has been ordered the relevant details will be reported on a “tape” and sent to the brokerage firm (Brokerages firms can be compared to Forex brokers). The brokerage firm will inform the investor that has placed the order. Computers play a large part in this process, especially in ‘program trading’ although a reasonable amount of human contact is also present.

Trading at a virtual listed Stock Exchange is done through a network of computers; one of these virtual exchanges is the NASDAQ. The NASDAQ is also an US based Stock Exchange but sellers and buyers are paired electronically. One of the market makers of the NASDAQ exchange will give a fixed bidding and asking price. This means that companies will buy and sell their stocks at this fixed price.

The Paris Bourse is also an order-driven Stock Exchange, part of Euronext. In the late 1980’s this Paris based stock exchange went digital. Before the 80’s they used the “open outcry” method. Stockbrokers would meet at the Palais Brongniart or on the stock exchange floor. The CATS trading system was later introduced in 1986 and the order matching became an automatic operation.

At certain times, active trading (particularly in sections of securities) shifted away from exchanges that were ‘active’. Firms of securities that are run by UBS AG, Credit Suisse Group and the Goldman Sachs Group Inc. move approximately 12 percent of the U.S security trades away from the stock exchanges and towards their inside systems. By 2010 that share may rise to 18 percent. According to information collected by the Boston branch of the Aite Group LLC (a brokerage industry consultant), this will only occur if more investment banks manage to match buyers and sellers themselves and avoid the NYSE and NASDAQ.

Computers have made it possible to work without trading floors and Big Boards, and consequently the power balance in equity markets is moving. Brokers pay smaller amounts of exchange fees and receive larger shares of the annual $11 billion trading commission. This is due to having more in-house orders which enables clients to trade large stocks anonymously.

In some of the Forex trading programs, the stock market is accessible. Plus500 offers many Stock options and you can participate in the German and Dutch Stock Exchange markets. Plus500 also allows you to invest in gold, oil and more.

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Andy has been writing informative articles on finance and investments since 2014. With extensive experience in making money from small investments he is the right man for the job.

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