Stock Market Made Simple: How is a Stock Traded?

In the first blog of our new Stock Market Made Simple series, which you can read here, we learned what a stock is and how you can benefit from owning shares of a company’s stock. Today, we are going to take a look at how you can purchase and sell stock – which brings us to the stock exchange and the open market.

What Is a Stock Exchange?

A stock exchange is the place where you can purchase and sell publicly traded stocks such as Apple (AAPL), Tesla (TSLA), Disney (DIS), and a myriad of other companies. Using a stock exchange, you can put the stock you own up for sale and you can request the purchase of stock other people own as well. Two of the most popular and well-known exchanges are the New York Stock Exchange (NYSE) and the Nasdaq, as they handle most of the stock changing hands in North America.

How Does the Market Work?

Interestingly enough, when a stock is bought or sold on an exchange, it is not a seller or a buyer who is directly communicating with the exchange or each other. It is a broker which is handling all of the little details of the sale or purchase. You can think of your stock purchase as a car purchase. When the stock or in this case a car was originally offered, you purchased it directly from one of the company’s representatives or dealers.

For example, if you wanted a Nissan vehicle, you went to a Nissan representative to purchase the vehicle. However, once the car is purchased, it is now owned by you, the buyer, and the original company has no claim of ownership to the car. You can then keep the car, park it, drive it around for a little to show your friends, and even sell it when you are ready.

But to sell it, you need to use a broker which provides a service very much like eBay Motors. You offer your car for sale on their platform, and when it sells, you pay eBay a part of your sale profits for using their platform as the place to host your transaction.

Stockbrokers such as TD Ameritrade, Charles Schwab, and TradeStation are prime examples of places you can go to buy and sell your stock. They handle all the various details of connecting buyers and sellers and provide you a place to conduct your business. In exchange for these services, all the brokers ask for is a small fee each time you do a transaction. But even that is changing as recently many brokers have been waiving fees for stock trades, which makes entering the marketplace more accessible. In summary, you use a broker’s platform to buy and purchase a stock from other buyers and sellers on a stock exchange.

How is a Stock Price Determined?

The current price of a stock is set by the economic principle of supply and demand. If there are more buyers for a particular stock, then there are sellers on the open marketplace, then the price of the stock will rise as buyers offer more money to purchase from the smaller pool of available sellers. The opposite is also true as the price of a stock will fall when there are more sellers of a stock; then there are buyers as the demand for the stock is overshadowed by the supply.

It is possible to track the forces of supply and demand by using a stock chart. In the next blog, we will look at what types of charts are available, and how to use them to see where there is buying and selling pressure. See you guys next Thursday!