How are stocks traded?

Most stocks are traded on one or more exchanges. A place where buyers and sellers can meet and decide on a price. Originally this was the place where buyers and sellers were meeting in person, but now most exchanges are automated in rooms full of computer servers.

The purpose of an exchange is to facilitate the transfer of shares and have certainty of settlement and payment. Just imagine how difficult it would be to sell your Telstra shares if you had to ring your friends and associates and you may don’t get paid once you agreed on the price (settlement risk).

Earlier we discussed how a company would issue new shares into the market to raise cash. This is what’s called the Primary Market. You might also recognize it as the IPO or initial public offering of a company.

In the Secondary Market, these previously issued shares are then traded by investors, speculators, algorithmic traders, company owners and other market participants. Normally the Secondary Market is referred to by people as the Stock Market.