11 May 2020

How Stock Market Works

By DICC Institute

The placing of orders on the stock market

To buy stocks, bonds or derivatives on the stock market, you must go through a broker. You need to open a securities account with your bank or open a trading account with an online broker. The broker or bank then allows you to place stock market orders on the various financial assets. You can then start trade in the financial markets of your choice or invest in the medium / long term basis. This article will answer several questions such as: How does a stock exchange work?, What is the mechanism for placing an order on the stock exchange?

Also Read: What is stock market and stock exchanges and role of stock market in economic growth

Attention, before start trading in the financial markets and hoping to earn money, you must take the time to train yourself well enough so that you would not bear losses from the stock market. It is essential to open a virtual trading account (demo account) to familiarize you with the functioning of the stock market and speculation on the equity markets or stock market indices .Trading and investing involves risks. These risks are multiplied if you use leverage.

The stock market: an organized and regulated market

The stock market is an organized market and all transactions are therefore guaranteed by a clearing house or the broking house. It is the clearing house which is responsible of all stock market orders, buyers and sellers. In other words, buyers never come into contact with sellers. It is responsible for the settlement and delivery of securities once the stock market orders are transmitted to the market.

The stock market is also a regulated market. The rules of operation of the stock exchange are set jointly by the financial market authorities and market companies. Market companies play a vital role in operating the various world stock exchanges. All market companies are linked to a single trading platform. Market companies are responsible for transmitting orders to the market. These companies have institutional clients (hedge funds, banks) and private companies (brokers) as clients. The role of the latter is to collect orders from their customers (including your stock market orders) and then transmit them to the market operator. On the Stock Exchange, each buyer or seller has their own financial intermediary.

The mechanism for processing a stock market order

The processing of a stock market order (market order, limit order, etc.) is fully automated and computerized. The only human operation is necessary only in placing of orders of buying and selling. Then, your stock market order follows several steps:

– Your financial intermediary transmits your order to the market operator or your broking house.

– The market operator collects and routes orders from all of its customers via a system routing, then your order is executed

– Distribution of executed (and pending) orders in the order book of the securities reaches to the concerned person, and then the order is transmitted to the clearing house.

– Payment and delivery of securities are then made by the clearing house which is to be done to all buyers and sellers. They therefore play the role of intermediary between the various brokers and institutions that collect orders from their clients.

– The transaction is transmitted to an account manager who is a sort of stock market accountant. He is responsible for registering all of the securities you hold on your stock exchange account. This electronic format replaces the physical format of trading and it is fast and automated.

In order to understand the proper mechanism of how stock market works join DICC stock market course now and learn everything practically.

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