Transcripts

How Wall Street Works - How a Stock is Traded

SUSIE GHARIB: Once a company goes public, it usually doesn't sell its shares to new investors. But you can still buy the firm's stock if you can find a shareholder who's willing to sell it to you. For that, you go to a stock market like this one, the New York Stock Exchange. On any given day, several billion shares of stock change hands here and a similar level of activity occurs at the competing NASDAQ stock market. That's possible because each stock trade is accomplished in no more than a few seconds and often a lot less time. Scott Gurvey looks at the process that makes a stock trade happen.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: When you think about buying or selling stock, the image that comes to mind is probably this one -- the floor of the New York Stock Exchange or NYSE for short. Here stocks are traded by open outcry, with brokers calling out their offers and specialists acting as auctioneers, bringing buyers and sellers together. When buyers and sellers are far apart on a price, the specialists try to maintain an orderly market, sometimes by buying or selling for their own inventory. It takes an average of nine seconds to execute a trade in this way. But the mechanics of trading have changed dramatically in recent years.

RICHARD HARRIS, SPECIALIST, BEAR WAGNER SPECIALISTS: The reality is that 80, 90 percent of the order flow now is electronic. There's still orders that are sensitive enough that they want a human broker on the floor, or the stock may be illiquid enough that they want somebody personally handing it in front of the specialist. But with the increase in algorithms and program trading, most of the order flow is electronic now.

GURVEY: So even if your stock is listed on the NYSE, the odds are your order will not be executed here on the floor but someplace else, most likely inside the maze of computers connected by networks, which now make up the global trading system. The NASDAQ is a virtual exchange. All the trading is done over a computer network and there is no trading floor. To place an order to buy or sell a stock, you can visit your broker's office or call her on the telephone. But it is increasingly common for individual investors to enter their orders by using their broker's proprietary computer software or on their broker's Internet site, which can provide stock research and analysis as well as trading. For most listed stocks, you can readily see the bid and the asked; that is, the highest price someone is willing to pay and the lowest price someone else is willing to accept for the stock at that moment. If you are willing to buy or sell at or near the current market price, you put in a market order. A limit order means you are only willing to buy or sell a stock at a price that you set. With a market order, you may get confirmation that the trade has taken place almost immediately. That's because the order is electronically matched by the trading system computers in just a fraction of a second without human action. Wherever your trade is executed, you can expect to get confirmation delivered to you electronically and depending on the computer system you use, the computer can even automatically post the transaction to a portfolio of your stock holdings. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.