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Stock Trading On NASDAQ - How It Works

Jun 5, 2008
The NASDAQ though we know it as an exchange is not an exchange, and works like an automated mechanism where buyers and sellers can meet. The NYSE works on the system called double auctions where in the highest bidding buyer competes with other buyers and the lowest bidding seller bids against other sellers.NASDAQ though not very old has give tough competition to NYSE.The technology focus has helped NASDAQ some inherent strengths.

Now for NASDAQ the auction method does not work, it is like a series of dealers which are selling stocks and each dealer has some sort of inventory of stocks as well as cash. Now NASDAQ is completely automated so going by above analogy you do not visit each dealer shop instead the computer system visits the store of each dealer and checks what prices and how much shares does each dealer have to satisfy an order.

Now there are two types of orders market order and limit order. Let us say that you have a limit order which means that you are neither willing to buy above that set limit nor willing to sell below that price. Market order means that you are saying that at whatever price the dealer is holding the inventory the system should go ahead an buy that. So what happens when the dealer only has 500 shares and you place an order for buying 1000 shares at market price? For the fulfillment of this order you will get 500 shares of the order at the stated price and another 500 shares at the price the dealer says it got somebody to sell the shares to you. Now this price may be higher or below the price at which you got the initial 500 shares.

NASDAQ as you can see is the interdealer market represented by securities dealers and these dealers are called market makers. These dealers then compete with each other to post their best prices (both bid and ask). A normal non professional person can have access to this bid offers, ask size, size of each offer and they are called level II quotes. The system that provide the quotes is called Small Order Execution System.

In conclusion, NASDAQ seems to favor the small investor like you and me for trading and that is all that matters in the stock trading arena.However there are other exchnages which can help really really small investor with special deals and cash only options like the American Exchange. The there is OTCBB which trades in only penny stocks, but trading on OTCBB can be very very expensive and very volatile.
About the Author
Amit regularly provides tips for stock market for beginners and has helped people on how can stock market investing for beginners can help new investors.
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