Lesson 3: How Stocks and Bonds Are Traded
Now that you understand the different types of securities, let’s explore how they are bought and sold in financial markets. This lesson covers:
1. Stock Exchanges & Trading Venues
Stocks are traded on organized exchanges where buyers and sellers meet.
Major Stock Exchanges:
- New York Stock Exchange (NYSE) – Largest exchange, mostly blue-chip stocks.
- Nasdaq – Tech-heavy exchange with electronic trading.
- London Stock Exchange (LSE), Tokyo Stock Exchange (TSE), etc. – International markets.
Over-the-Counter (OTC) Markets:
- OTC Markets – For smaller companies, illiquid securities, and bonds. Trades happen directly between parties rather than on an exchange.
- Dark Pools – Private exchanges where institutional investors trade large blocks of stocks to avoid affecting market prices.
2. Order Types & Execution
When trading stocks, you place orders through a broker. Here are the key order types:
Basic Order Types:
- Market Order – Executes immediately at the best available price.
- Limit Order – Executes only at a specific price or better.
- Stop-Loss Order – Automatically sells when a stock drops to a certain price.
- Stop-Limit Order – Combines a stop-loss with a limit order.
Advanced Orders:
- Trailing Stop Order – Moves with the stock price, maintaining a set percentage or dollar amount below the highest price.
- Fill or Kill (FOK) – Must be executed immediately in full or canceled.
- Good Till Canceled (GTC) – Stays open until manually canceled.
Order Execution Process:
- You place an order with your brokerage.
- The order goes to an exchange or market maker.
- If a matching order is found, the trade executes.
- You receive confirmation and the security is added to your portfolio.
3. How Bonds Are Traded
Bond trading differs from stocks in several ways:
Primary Market vs. Secondary Market
- Primary Market: Bonds are first issued by governments or corporations (like an IPO for stocks).
- Secondary Market: Investors trade previously issued bonds among themselves.
Key Bond Trading Platforms:
- NYSE Bond Market – Trades corporate and government bonds.
- Electronic Trading Platforms (e.g., TRACE, Bloomberg) – Used by institutional investors.
Bond Pricing Factors:
- Interest Rates: When rates rise, bond prices fall (and vice versa).
- Credit Ratings: Higher-rated bonds (AAA) have lower yields but less risk.
- Liquidity: Government bonds are more liquid than corporate bonds.