To start trading in the stock market, it helps to understand the key market players and their roles. There are three different types of traders in the market:
All three types of traders make money the same way: through buying and selling stocks. The primary differentiator between the three is merely the volume of stocks they buy and sell and the amount of capital they have in the system.
Brokers are the people who bring your trade to the market. A broker is your connection to the market. He or she gets paid by the trader through commissions from your trades. Brokers can be classified as full-service brokers or discount internet brokers. The full-service brokers might be considered a little old school these days, and they aren’t usually required. Most traders will use a discount internet broker like eTrade or Scott Trade.
TradeSmart University does not have an official broker, nor do we endorse any particular broker. However, to help get you started, here are some brokers we like.
The next key player in the stock market that you’ll need to know is the Market Maker. Market makers provide liquidity to the market. They are the players who make sure that the trades are happening. Market Makers offer both a buy price and a sell price on stocks at any given time to ensure as best they can there is always something to trade.
The Market Maker makes sure the market happens. They make money from the difference between the price to buy and the price to sell. This is known as the Bid/Ask spread. For example. If stock XYZ is selling for the bid price of $100, but it’s ask price is $101 to buy it, the market maker keeps that $1 difference. Also, the Market Makers will adjust prices on trades to attract buyers and sellers to them. This is one reason for fluctuation in the market.
The final key player in the stock market is the Exchange. The Exchange is exactly as it sounds. It is the central hub or gathering place for the trade action or exchanges to take place. These days, this is primarily an electronic process as the Exchange makes money by charging fees to companies in exchange for having their stocks listed.
An extension of the Exchange is the Clearing House. The Clearing House is like the “bank” of the market. Every trade that happens must pass through the Clearing House. It records and balances the books for every single transaction.
To sum up the market process: you, the trader, decide on a trade and bring that to your broker, who then brings it to the market makers. Then, the actual trade takes place within the Exchange and is processed through the Clearing House.