How Do Stocks Work?

Before we go any further, let’s take a look at a hypothetical scenario so we can see the steps involved in purchasing or selling a stock (these names have been chosen for the purpose of illustrating this point, any resemblance with persons living or dead is purely accidental):

1. Lucas Guilloud of Nantes, in western France, decides to invest in the stock market.

1a. Diane Maes, a resident in Brussels, Belgium, decides to sell 300 shares of XYZ Corp. (XYZ) stock to help pay for a new car.

2. Lucas has been thinking of investing in the XYZ Corp. He calls his brokerto get a quote on XYZ; that is, to find out the highest bid to buy and the lowest offer to sell.

3. Lucas’ broker and Diane find out the current quote and price for XYZ from an electronic data system that continually updates information directly from NYSE Euronext.

4. Taking into account what he already knows about XYZ — and after a discussion with his broker —Lucas instructs his broker to purchase 300 shares of XYZ at the current market price.

4a. Diane logs into her online brokerage account, which is linked to NYSE Euronext, and places an order to sell her 300 shares at the current market price.

5. Both orders are sent electronically to NYSE Euronext.

6. A Designated Market Maker (DMM) uses enhanced technology to bring together buyers and sellers, improve prices and serve as a point of accountability.

7. The NYSE Euronext trading engine automatically executes any market or limit order that is marketable against the exchange quote up to 1 million shares.  This is called auto-execution.

8. Both orders are represented as auction market orders in order to have the opportunity for price improvement. The DMM oversees all orders to make sure the transactions are executed fairly and in an orderly manner.

9. After the transaction is executed, notices are sent to the firms originating the orders and to the consolidated tape so that a written record is

made of every transaction.

10. The transaction is reported by computers and appears on the consolidated tape displays across the country and around the world.

11. The transaction is processed electronically, crediting Lucas’ brokerage firm and debiting the account of Diane’s brokerage firm. Lucas’ broker calls him and tells him at what price he bought 300 shares of XYZ. In a couple of days, Lucas receives a written confirmation in the mail. Diane receives confirmation from her brokerage firm electronically on her computer within seconds. These confirmations describe the trade, its terms and conditions, and the exact amount to be paid or received.

12. Lucas settles his account within three business days after the transaction by submitting payment to his brokerage firm for the 300 shares of XYZ, plus any applicable commissions.

12a. Diane’s trade is also settled in three business days. Her account will be credited with the proceeds of the sale of stock, minus any applicable commissions.