Stocks are traded in two places. They can be traded in an exchange, which is a physical location in which traders run back and forth, yelling, and signaling each other; the New York Stock Exchange (NYSE) would be an example of this type of exchange. If stock is not traded in a physical exchange it is traded in an Over-the-Counter (OTC) market online through a network of computers which are setup to make trades electronically; the Nasdaq is an example of this type of exchange.
There are two types of markets within a stock market: the primary and the secondary. The primary market is where stocks are sold for the first time, being made available through an initial public offering (IPO). The secondary market is the one in which stocks are resold and bought after their IPO; generally when someone speaks of the stock market they are referring to this market as it the most commonly used one.
Trading in a Stock Exchange
In a traditional stock exchange, trading is done face-to-face on a trading floor. Brokerage firms, who are members of the exchange, receive orders when the market opens for the day. After being received, orders flow down to the floor brokers. At this point, floor brokers will run to a specific place on the trading floor. Each stock has its own location within the exchange where it is bought and sold. This location is known as the trading post, and each trading post has its own specialist who will match buyers and sellers for that specific stock. Prices in an exchange are determined by an auction method, in which the current price is the highest price any buyer will pay for that stock, and the selling price is the lowest price any seller will sell at. Through the auction method, the stock's specialist will match a buyer to a seller. After a trade has been made, the details are returned to the brokerage firm, who will contact its investor that placed the buy or sell order. Meanwhile the floor broker will run off to fulfill the next order.
Trading in an Over-the-Counter Exchange
An Over-the-Counter exchange has no physical location like a traditional stock exchange does. Nor does it have floor brokers either. Rather an OTC conducts its trades through a network made up of computers and a telecommunications network of brokers. Brokers play the part of market makers for various stocks in an OTC. As market makers, they provide a continuous run of buy and sell prices and percentage spreads for the shares that they are designated to trade in the market. Market makers will keep an inventory of shares in order to meet the demands of investors; doing so allows for new investors to enter the market, and for current investors to expand their portfolio of stocks. In addition, market makers will match up buyers and sellers, performing the trades on an OTC market. Market makers function similar to the specialists in the traditional stock exchanges, except that they will work with several different stocks rather than specialize in one.
OTC exchanges are increasing their status and importance in the stock market. It used to be that the largest companies only traded in traditional stock exchanged like the NYSE. However, with the rise of the internet, OTC exchanges, such as the Nasdaq, are home to companies such as Microsoft, Intel, Dell, Cisco and Oracle. With large companies such as these trading in OTC exchanges, these exchanges are providing serious competition for traditional stock exchanges.