The following are the steps that are followed in any typical stock transaction:
Placing of Buy/Sell Order = The first step of any stock transaction begins when a potential investor or buyer decides that he wants to buy a particular stock. For this purpose, the buyer places an offer to purchase the stock with a broker. This broker may be an independent broker or may be working as an employee with a brokerage firm. The independent broker or the brokerage firm are a registered member of the exchange and are allowed to trade on the exchange. On the other hand, a seller of the same particular stock may also express to the broker, a desire to sell a number of shares.
Relaying of Information = The next step is that of implementing the buyer’s or seller’s request. The independent broker or the brokerage firm on receiving the buyer’s or seller’s request gets in touch with its representative at the securities exchange. The independent broker or brokerage firm relays the offer price or bid price for buying the stock, and the seller’s broker relays the sale offer or ask price, through their respective representatives at the exchange.
Reaching the Specialist = The representatives of both the buyer as well as the seller then go to the specialist for that stock at a physical location on the floor of the exchange. This physical location is known as the ‘specialist’s post’. The specialist is the person at the exchange who is responsible for matching up the buy and sell orders for a particular stock.
Matching of Buy and Sell Order = The next step after reaching the specialist is performed by the specialist himself. The specialist receives information about the bid price and ask price from the respective representatives. Then, based on the bid and ask information received from many buyers and sellers, the specialist is able to match up buyers and sellers fairly. Moreover, if there are too many buyers relative to sellers, or vice versa, the specialist actually sells or buys the shares as necessary to meet the market’s demand. It is due to this reason that, specialists are sometimes referred to as ‘market makers’.
Transfer of Stocks and Money = The last step of any stock transaction is that after a match is made, the independent broker or brokerage firms relay the information back to the buyer and seller of the shares. Money and shares are then transferred through accounts at the respective brokerage firms.