What Is a Stock Trade?

By Business & Finance Last updated Sunday, May/19/2024

Mechanisms of Trading

Due to the complex nature of the stock markets' operation, as well as the potential for fraud and abuse of the system, a license is required to execute stock trades. People without a trader's license who wish to engage in trade may enlist the services of an agent called a "broker." With the advent of widespread Internet access, online brokerages have offered this service via online transactions. Traditional brokers cost more in terms of brokerage fees than online brokerages, however, they typically can offer more advice and analysis to clients.

The simplest forms of trading involve the purchase or sale of a given stock (sometimes called a security). This can actually be viewed as one transaction, since shares sold by one investor must be purchased by another. Because there are usually so many people worldwide who wish to sell or buy a particular stock, trades (whether buying or selling) can often be made at will. Where fewer shares are outstanding, there is less interest in the stock or when the majority of investors are on one side of the buy-sell equation, trades may take longer to complete.

The trade of stock -- sale from one investor to another -- forms the foundation of the equities markets. However, various other types of transactions exist as well. "Shorting" a stock is borrowing shares, immediately selling them and then purchasing them later to return to the lender. Investors do this in hopes that the stock will decrease in price and render a profit. "Margin" accounts allow investors to leverage their portfolios' power by borrowing funds. There are limits on how much of your portfolio's value can consist of borrowed funds and sometimes shares must be sold to conform to the margin agreement.

Derivatives are financial instruments (another type of security) that "derive" their value from the value of another financial instrument (sometimes common stock). "Options" can be purchased that entitle an investor to purchase or sell a given number of shares of a designated stock at a pre-determined price. Convertible bonds are debt securities that can be converted into shares of stock. They can be traded as bonds before conversion or as shares of stock after conversion.