Who does not like stock market trading

Exchange trading follows these rules

Exchange trading works like a vegetable market - only pricing is much more strictly regulated. Investors should know how this works and which order types they can use to optimize their performance.

“Buy stocks, take sleeping pills, and stop looking at papers. After many years you will see: You are rich », this bon mot is attributed to the Hungarian stock market and financial expert André Kostolany. Anyone who looks at the development of the stock indices over decades must agree with the well-known speculator. According to data from the private bank Pictet, Swiss stocks have had an average nominal annual return of 7.6% since 1926.

In the current low interest rate environment, it would make sense to invest in stocks - also because the dividend yield for many companies is higher than the interest that the same company pays on its bonds. Stocks are risky, so the portfolio must be diversified. You can achieve this with an exchange-traded fund (ETF) - or you can manage a diversified portfolio yourself. In order to be able to get involved in the stock market, the investor needs a stock portfolio with a bank. Financial and economic knowledge are also indispensable. However, this text only deals with the technical process of stock trading.

Switzerland, a pioneer

The Swiss stock exchange was the first to switch to a fully electronic system for share trading and custody in 1996. Previously, the equity securities were traded “à la criée” in the ring trade. The ring traders received orders from customers in the so-called ring offices by telephone and implemented them with other traders by “shouting” supply and demand into the ring. Today's volumes would no longer be manageable with this method.

Swiss stocks are losing weight

Market capitalization of SMI and SPI (in billion CHF)
Swiss Performance Index (SPI)

Until a few years ago, the national stock exchanges were more or less monopolists. The shares listed on the home exchange were mostly 100% traded on it. Individual securities were also listed on foreign stock exchanges. In 1998, Alternative Trading Systems regulation came into effect in the United States. The EU followed suit with the introduction of Mifid I in 2007. Trading through alternative trading platforms was allowed.

In addition, banks and brokers were allowed to balance customer orders internally first (netting) and only forward the remaining orders. Around three quarters of Swiss shares were traded in Switzerland until July 1, when the EU no longer recognized the stock exchange equivalence of the SIX Swiss Exchange. The rest on alternative exchanges. The largest share was held by CBOE Europe with around 15%.

The new order book for Swiss shares is available to everyone on the SIX Group website under “Market data”. There you can find information about how many shares buyers are looking for, at what price and under what conditions shares are being offered (summary). Before placing a stock market order, it may be worth taking a look at this site to get an idea of ​​which price is realistic and where the buy or sell limit should be set.

Define asking prices

Open orders occur when buy and sell orders with the right price expectations are not in balance. Stock market orders can be placed with certain guidelines. The simplest type is the "best" order. The share should be sold or acquired as soon as possible. No price specifications are made, only the amount to be traded is specified. In the case of less liquid securities and for stock exchanges that are closed, the order can be processed at a price that is much higher or lower than the investor would assume based on the listing at the time the order was placed.

The volume has exploded

Global Stock Trading Volume ($ thousands billion)

In order to avoid such losses, a limit can be set for the stock market order for a certain period. In this way, the investor avoids buying too dearly or selling too cheaply. However, there is a possibility that no counterparty can be found for the asking price and that the order will not be executed within the defined period.

The “stop loss” order is only possible for sell orders. It is suitable for investors who do not keep an eye on the stock market every day - for example, on vacation - and who want to limit their losses if the share price weakens. The sale is only triggered if the defined threshold is not reached. The order then takes place «perfectly».

If the stock is in free fall, it is possible that the order will settle well below the threshold. To prevent this, there is the “stop limit” order. This sales order also has a defined threshold at which it is triggered. In addition, an even lower lower limit is chosen. If this is not reached, the order will no longer be executed. In this way, the investor does not sell at low prices in the event of short-term panics or flash crashes.

In the computer system of the stock exchange, buy and sell orders are brought together (matching). The process takes place in the order book and is subject to strict rules. The price-time priority applies to the placement in the order book. The "best" orders are taken into account with limits before the orders. The price order applies to the latter. When buying, the highest limit has priority. The lowest when selling.

The price is set where the most shares can be traded, taking into account all customer specifications. The ask price is the lowest price at which the seller offers a security. In contrast, there is the bid that a buyer is willing to pay. The difference (bid-ask spread) is the margin that the seller receives.

Ordered delay

If the prices of a company come under massive pressure during trading, for example because of a large sell order, trading is interrupted, known as “stop trading”. For example, if the price that is likely to follow deviates by more than 2% from the current price, the share can no longer be traded for five minutes.

If the opening auction comes to a price that deviates significantly from the reference price, the SIX Swiss Exchange, as the exchange operator, can delay the start of trading for a share by 5 or 15 minutes (Delay Open). The closing price of the previous trading day is used as the reference price at the opening. A delayed start often occurs when important news about a company is announced before trading begins and an unusually large number of investors want to buy or sell.

Many commentators cite early morning trading in Switzerland, which gives an indication of the coming trading day. Bank Julius Baer enables SMI and important SPI stocks to be traded between 8.00 a.m. and 8.45 a.m. The pre-market SMI level is calculated from this trading, which takes place via a bank and not the stock exchange. Between the end of trading on one trading day and the opening of the next trading day at 9:00 a.m., the electronic exchange system accepts orders and performs a theoretical matching, from which a theoretical opening price is calculated. But there are no deals.