Trading stocks

How are stocks traded?

Most major stocks are traded on the stock market. This is a general term for a global network of specific exchanges where stocks are bought and sold.

For example, the majority of UK stocks are traded on the London Stock Exchange (LSE), while most US stocks can be found on the New York Stock Exchange (NYSE) or Nasdaq.

These exchanges are highly regulated marketplaces where buyers and sellers come together to negotiate the transaction of stocks. Only authorised individuals can trade directly on an exchange, so most investors place their orders through a stockbroker.

What is a stockbroker?

The role of the stockbroker is to buy and sell stocks on their clients' behalf. Traditionally, an individual investor would need to call up their broker, who would then relay the trading instructions to a qualified dealer on the exchange. Nowadays, however, this process is almost always conducted online.

There are three main types of broker:

1. Full-service

   Create and execute a strategy based on the investment goals of the client – trading on their behalf.
   High commission

2. Advisory

   Provide investment advice and recommend specific trades but leave the final decision to the client.
   Medium commission

3. Execution-only

   Simply carry out the client's trading instructions, usually via an online platform. No advice given.
   Low commission

When choosing a broker, it's important to consider your knowledge of the markets as well as the amount of time you're prepared to commit to watching your portfolio. Most online brokers now offer execution-only accounts, where you make your own trading decisions using an online platform.

Trading times

Stocks are only traded during the opening hours of their designated stock exchange. Below are the opening and closing times of a few major exchanges.

Please note that these are approximate core trading hours and don't include pre-market or after-hours sessions. Actual times may vary slightly due to lunch breaks (particularly for Asian exchanges). Times may vary by one hour during daylight saving periods (UK and US).

How do stocks become listed on an exchange?

Companies are either privately owned or public.

A private company isn't listed on a major stock exchange, so you would usually have to contact the owners directly to buy stocks. Even then, they are under no obligation to sell them.

However, if the owners want to 'go public' to raise capital or boost the company's reputation, they must carry out an initial public offering (IPO). Following an IPO, the company's stocks are listed on a stock exchange, and ordinary investors can buy and sell them.

Publicly listed companies often have many more shareholders than private ones and are subject to much tighter regulations. The exact rules tend to differ depending on the exchange, but generally a public business needs to appoint a board of directors and disclose detailed financial information at least twice a year.

Dividends

One possible benefit of owning stocks is the potential for dividends. A dividend is an amount of money paid to shareholders, representing a portion of the company's profits.

When a company makes a profit, the management get to decide how much to put back into the business and how much to pay to the shareholders as a dividend.

Dividends can compensate for a stock price that isn't moving much, giving shareholders an income instead. Companies that are expanding rapidly usually don't offer dividends, choosing instead to reinvest all their profits to sustain growth. The potential reward for shareholders in this case is a higher expected stock price in the long run.

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