Headline: It’s Always Good to Have a Healthy Ticker

Date: 1/7/2021

Body: I was reading the February 2021 edition of Kiplinger’s Personal Finance, and they had a really nice article, starting on p.62,  on the “Anatomy of a Stock Trade.”   There are a lot of moving parts.  Before I start, I will likely be using the word “execution” within this discussion.   This has no connection to capital punishment (unless you lose your capital in the trade… get it?)   OK, lame jokes aside, execution simply means the processing and fulfillment of an order on the stock market.   This is seen by many as a “black box”, and my objective is to shine a flashlight so as to get an idea of the contents.

How does this process work?

OK.   You want 100 shares of Ford stock, so you write out an order (it’s on your cell phone, they make it VERY simple) saying that you wish to purchase 100 shares “at the market.”   This means that the company is now required to give you the “best execution” that they can (required by the SEC.)   This is a complicated calculation between speed of execution, execution costs and share price.   Their computer picks the best place to purchase your 100 shares (e.g. either internally, on a public exchange or perhaps there is a non-public exchange that they know about.)

Whatever route is taken, that entity receives your cash and issues a confirmation that you now own the shares that they used to own, that goes back to your brokerage.   After that, the brokerage gives you a confirmation that your trade has been executed.  But, missing from this illustration is a fascinating portion of the computer loop that happens so fast today.   Between the receiving of your cash and the issuance of the shares, the transaction has to go to a clearinghouse where it is “cleared.”   In essence, these (computers now) confirm that your seller does indeed have 100 shares of Ford to sell, and that you do indeed have the ready cash to pay for them.   Then the trade is “done” the shares disappear from their account and appear in yours, and the share price for these shares is withdrawn from your bank account and credited to them.  This trade does affect the stock price in some way.  (100 shares is miniscule, if you were buying thousands of shares as an institutional investor, then you could materially change the stock price.)  This clearance process used to take days, and now takes microseconds.

I thought it was more complicated than this?

In High School Economics class, you probably learned about how there were people, with different colored shirts or vests, literally running through an inch of paper thrown on the floor.   That was the stock market of old: Except in some rare instances, this is not the case.   Even Usain Bolt cannot outrun an electron passing from computer to computer.  These people that you learned about in High School had such jobs as “Market Maker” or “specialist” and would have different jobs in facilitating trades.   But this doesn’t happen anymore, unless you’re investing in commodities markets or perhaps using options.

How much does it cost to trade a stock?

Let’s take an example.  Say I wanted to purchase 100 shares of Ford stock, same as before   Such a simple order used to be $9 per trade or so, and now, it’s much cheaper.  So, we are not speaking of a material expense.  But, the companies are not trading for others out of the goodness of their hearts, and the SEC requires them to do some fairly extensive reporting, so, there will always be some cost.

Be aware that the stock price you see on your choice of website may differ from the stock price you are charged.  (It’s usually pretty close.)   Especially within volatile markets, price changes can happen quickly, and your price will fluctuate (a little) as a result.

When does it make sense for me to trade individual stocks?

In my view, trading should take place pretty rarely.  Being a normal human (ostensibly) most of your investment activity would probably be most responsibly done in a mutual fund of some type.   But, sometimes, you do research, and you find something that you don’t think many others have discovered.  (For instance, there was a storage company that wasn’t doing well, but one investor realized that the physical real estate of the company was a HUGE asset that most others were ignoring.  So, he bought shares at a very low price.   As they began to sell off their very valuable urban real estate, the share price skyrocketed.  He made a lot of money.)   So, this doesn’t happen often, but sometimes it does.   When you do see a potential opportunity, I recommend that you “sell the idea” to yourself.   Write down 4 to 5 reasons you should purchase the stock, and then 4-5 reasons that you shouldn’t.   If you can refute each item in the second group (while maintaining a straight face), AND feel confident about the first group, then you might want to invest in that individual stock.   It is my further suggestion to keep this writing so that you might have a better idea of when to sell the stock.


Execution Definition (investopedia.com)

SEC.gov | Trade Execution:

How Does Stock Trading Work? (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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