How Trading Stock Works Step-by-Step

In the era of online investing, you can buy or sell stocks with the click of a mouse button. But as with all technology, what seems simple on the surface is in reality quite complex. Trading stocks, even in the electronic realm, involves a number of steps and a number of players. Knowing the mechanics of trading stocks can help make you a more informed investor.

Brokerage Account

Stock is typically traded on exchanges, but only members of the exchange can trade stocks on the exchange. Since you are probably not a member of any investment exchange, you need to have an account with an investments brokerage firm that is. If you don't already have an account with a broker, you must open one. This involves completing a new account application. You'll have to provide some personal information, such as your name, physical address and Social Security number. You might also be asked to provided proof of identity, such as your passport or driver's license to comply with provisions of the Patriot Act.

Stock Identification

There are more than 2,800 companies listed on the New York Stock Exchange. Another 3,200 are listed on the NASDAQ. Thousands of other company stocks are traded on other exchanges and over-the-counter. Before you trade a stock, you must identify the stock you want to buy or sell. Stocks typically have a unique symbol, and if you enter the wrong symbol, you will be trading the wrong stock. For example, if you want to buy 100 shares of Sirius XM Radio Inc. on the NASDAQ, you would use the symbol SIRI. If you entered the symbol CRUS, you would buy 100 shares of Cirrus Logic Inc.

Order Entry

Once you've determined the number of shares you wish to trade, and you have the correct stock symbol, it's time to enter your order. The most common order types include market orders, limit orders and stop orders. A market order trades at whatever price the market offers. It is the most likely type of order to be filled, but you might pay more on a buy order or receive less on a sell order than you want. A limit order sets the highest price you are willing to pay to buy stock, or the lowest price you are willing to accept to sell stock. A stop order is a protective order that only becomes effective once a set price is reached.

Funds

You must have the money available in your cash account, or sufficient equity in your margin account, to pay for your stock purchases when you place the order. If you are selling stock, you must either have the stock held in your brokerage account or deliver the stock to your broker prior to settlement.

Stock Trade Transaction

In the old days, stock trade transactions were handled on the floor of the exchange, where a broker with a buy order met a broker with a sell order and the trade was consummated. Online trading bypasses the human element and matches buy and sell orders electronically.

Settlement

Once the stock trade is made, there is still the matter of transferring ownership of the securities. This is accomplished on the settlement date, which is typically three business days after the trade date. The settlement date is the date when the money comes out of the buyer's account and is credited to the seller's account. It is also the date when ownership of the stock is officially transferred to the buyer.