How does online stock trading works


Short sellers are hoping they can profit off of the difference between the proceeds from the short sale and the cost of buying back the shares, referred to as short covering.

Typically this is done automatically, and the broker will also automatically take their shares back as soon as a short is covered. While short selling can be an extremely handy and profitable tool for traders under the right circumstances, it also comes with its fair share of unique risks. To begin with, short selling is inherently more risky than traditional stock buying because the potential maximum profit and loss imbalance is reversed.

When buying a stock, potential losses are capped at percent of the original investment and potential gains are unlimited.

When shorting a stock, the maximum gain is capped at percent of the original investment, and the potential losses are unlimited. Short selling also comes with a number of costs that typical stock buying does not.

Short sellers are charged stock borrowing costs that can exceed the value of the short trade if a stock is particularly difficult to borrow. Because short selling can only be done in margin accounts, short sellers must also pay margin interest on their positions.

In addition, short sellers are responsible for paying any dividends or distributions paid out by the borrowed stock. These costs can take a large bite out of any potential trading gains. While the FIX Protocol was developed for trading stocks, it has been further developed to accommodate commodities, [9] foreign exchange, [10] derivatives, [11] and fixed income [12] trading.

For retail investors, financial services on the web offer great benefits. The primary benefit is the reduced cost of transactions for all concerned as well as the ease and the convenience. Web -driven financial transactions bypass traditional hurdles such as logistics. Exchanges typically develop their own systems sometimes referred to as matching engines , although sometimes an exchange will use another exchange's technology e.

Exchanges and ECNs generally offer two methods of accessing their systems —. From an infrastructure point of view, most exchanges will provide "gateways" which sit on a company's network, acting in a manner similar to a proxy , connecting back to the exchange's central system.

Many brokers develop their own systems, although there are some third-party solutions providers specializing in this area. Some banks will develop their own electronic trading systems in-house, but this can be costly, especially when they need to connect to many exchanges, ECNs and brokers.

There are a number of companies offering solutions in this area. Many types of algorithmic or automated trading activities can be described as high-frequency trading HFT , which is a specialized form of algorithmic trading characterized by high turnover and high order-to-trade ratios. From Wikipedia, the free encyclopedia. Not to be confused with E-Trade. This article needs additional citations for verification.

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