How Are Deals Made on the Stock Exchange? What to Know Before Buying Stocks

How Are Deals Made on the Stock Exchange? What to Know Before Buying Stocks

Today, we will discuss stock exchange transactions. These transactions are fundamental concepts for anyone interested in trading or investing in securities. We will cover all the important aspects of stock exchange deals and examine the different types of exchange contracts.

The stock exchange is a marketplace that connects buyers and sellers of securities such as stocks, bonds, and derivatives.

A stock exchange deal is the process of buying or selling these securities, carried out between buyers and sellers on the exchange. The purpose of this transaction is to transfer ownership rights of the security from one party to another. A stock exchange deal is considered completed once the buyer and seller agree on the price and other terms of the transaction. The exchange acts as an intermediary, ensuring the smooth and secure completion of the transaction.

Who Makes Deals on Stock Exchanges?
Deals on the exchange can be made by various participants, including retail investors, institutional investors, and traders.

• Retail investors are individual investors who buy and sell securities for personal investment purposes.
• Traders also buy and sell securities on their own behalf, aiming to profit from short-term price fluctuations.
• On the other hand, institutional investors are large organizations such as mutual funds, pension funds, and insurance companies that invest significant sums on behalf of their clients.

These parties use different strategies and tools to execute deals, including algorithmic and high-frequency trading.

The Main Goal of a Stock Exchange Deal

The primary goal of a stock exchange deal is to facilitate the transfer of ownership rights for securities from one party to another. The buyer pays the seller an agreed-upon price, and the seller transfers the securities to the buyer. This ownership transfer is recorded by the exchange and the involved parties.

Buyers may aim to invest in companies they believe will perform well in the future, while sellers may look to liquidate their holdings to realize profits or free up capital for other investments.

The stock exchange provides a transparent and regulated environment for buyers and sellers to trade securities, increasing investor confidence and participation in the market. It also allows companies to raise capital by issuing securities, offering investors access to a wide range of assets.

Types of Orders for Stock Exchange Deals

To make a deal on the stock exchange, investors and traders can place orders through a broker. These orders can be buy orders or sell orders, depending on whether the investor wants to purchase or sell a security.

In an order, the investor specifies the quantity and price at which they want to trade the security. The price can either be market-based or specified as a limit.

For example, let’s consider the following types of transactions on the stock exchange:

Market Order:
Mykola is an investor who wants to purchase 50 shares of Apple at the current market price. Through his broker, Mykola places a market order to buy 50 shares of Apple. The order is executed at the current market price, which might differ slightly from the price Mykola saw when placing the order, as stock exchange prices can change very quickly.

Limit Order:
Another investor, Olesya, has recently studied the types of stock exchange transactions and wants to buy 100 shares of Apple, but only at a specific price of $50 per share or lower. Through her broker, Olesya places a limit order to purchase 100 shares of Apple at a maximum price of $50 per share. The order will only be executed if Apple’s market price drops to $50 per share or below. Olesya will not pay more than $50 per share for the purchase. If the market price does not reach her limit of $50, the order will not be fulfilled.

Conditions of a Stock Exchange Transaction

The conditions of a stock exchange transaction include the quantity and price of the security being traded, the settlement date, and any other terms agreed upon by the buyer and seller. These conditions are specified in the order placed by the buyer or seller and must be accepted by the other party for the transaction to be executed. The terms of a stock exchange deal can vary depending on the type of transaction.

The most common conditions of stock exchange transactions include:

1. Price: The price at which the transaction is executed, which can either be the market price or a specified limit price.
2. Quantity: The number of shares or units being bought or sold.
3. Time: The duration for which the order remains valid. For instance, a day order is only valid for the trading day on which it was placed.
4. Partial Execution: Whether the order can be partially executed. Orders can also be set as "all-or-none," meaning they must be fully executed or not at all.
5. Hidden Orders: Whether the order is publicly visible on the exchange. Some orders can be hidden from other investors to prevent large traders from influencing the market price.
6. Routing: The method by which the order is sent to the exchange. For example, an order may be routed to a specific market maker or executed through an electronic communication network (ECN).

By specifying these conditions when placing an order, investors can better control their transactions and manage risks and potential profits. It is crucial for investors to understand the different transaction terms on the stock exchange before placing an order to ensure it is executed as desired.

How Stock Prices Are Determined
The price of a stock exchange transaction is determined by the forces of supply and demand. Typically, the price of a stock exchange
transaction is the price at which the buyer and seller agree to execute the trade.
Here’s how it works:

1. Buyers and Sellers Place Orders:
   When investors want to buy or sell stocks, they place orders through their brokers. These orders can either be market orders, which are executed at the current market price, or limit orders, which specify a particular price at which the investor is willing to buy or sell the stock.
2. Orders Are Matched:
   The stock exchange matches buy and sell orders for a specific stock. This is done using a computer algorithm that pairs the highest buy order with the lowest sell order.
3. Price Is Determined:
   The price at which the orders are matched becomes the current market price of the stock. This price is influenced by the highest price a buyer is willing to pay (Bid) and the lowest price a seller is willing to accept (Ask).
4. The Process Is Continuous:
   The buying and selling process on the exchange is continuous, with new orders constantly being placed and matched. As a result, stock prices can change rapidly depending on the number and size of orders.

Apart from supply and demand, other factors can influence stock prices, such as a company’s financial performance, economic and political conditions, and investor sentiment. However, the principle of supply and demand remains the fundamental factor in determining stock prices on the market.

Now that you are familiar with the basic concepts of stock exchange transactions, the next step is to choose a strategy that suits you—investing, which involves buying and holding securities with the expectation of long-term value growth, or trading, which focuses on buying and selling securities over short periods to profit from price fluctuations. These topics will be covered in our upcoming articles.