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Exchange floor
Trading on the floor of the New ork .tock -*change 1the N .-2 is the image most people have thanks to television and the movies of how the market works. 3hen the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. )t could not look any more chaotic. et, at the end of the day, the markets workout all the trades and get ready for the ne*t day. Here is a step4by4step walk through the e*ecution of a simple trade on the N .-. !. 5. ou tell your broker to buy !"" shares of #cme $um%uats at market. our broker(s order department sends the order to their floor clerk on the e*change. 6. The floor clerk alerts one of the firm(s floor traders who finds another floor trader willing to sell !"" shares of #cme $um%uats. This is easier than is sounds, because the floor trader knows which floor traders make markets in particular stocks.
7. The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. # few days later, you will receive the confirmation notice in the mail. ,f course, this e*ample was a simple trade, comple* trades and large blocks of stocks involve considerable more detail.
Electronically
)n this fast moving world, some are wondering how long a human4based system like the N .- can continue to provide the level of service necessary. The N .- handles a small percentage of its volume electronically, while the rival N#./#0 is completely electronic. The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. 3hile this system lacks the romantic and e*citing images of the N .- floor, it is efficient and fast. &any large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading. 8or the individual investor, you fre%uently can get almost instant confirmations on your trades, if that is important to you. )t also facilitates further control of online investing by putting you one step closer to the market. ou still need a broker to handle your trades 9 individuals don(t have access to the electronic markets. our broker accesses the e*change network and the system finds a buyer or seller depending on your order.
Conclusion
3hat does this all mean to you: )f the system works, and it does most of the time, all of this will be hidden from you, however if something goes wrong it(s important to have an idea of what(s going on behind the scenes.
There are two main ways income or profits from investing in stocks may be ta*ed+
;oth of these ta*es may come into play and here is when and how they are different+
?nless there is a compelling reason, hold on to the stock long enough to %ualify for the long4term capital gains rates.
i!idend Tax
'ompanies that distribute profits through dividends create a ta*able event for you. The )B. ta*es dividends at !@A, but this is a ta*4relief provision that could e*pire after 5"!! if not renewed. ,therwise, dividends may be considered ordinary income and ta*ed at your current rate. There is not much you can do to avoid some ta* on dividends, unless you hold your stock in a %ualified retirement plan and have a dividend reinvestment plan.
Tax "lanning
)f you have made sure all of your capital gains %ualify as long term, your ne*t possibility is to look at any losing stocks you may want to dump. ou can take a capital loss in the same year you have a gain and offset it. This is one of the reasons the stock market some times dips toward the end of the year as investors dump losing positions to offset gains. However, don(t sell a stock just for ta* reasons. )f there is good reasons to e*pect the stock will rebound, it doesn(t make much sense to sell it.
#ash $ule
The )B. has a rule in place to prevent investors from selling a stock in a losing position to offset a gain, only to turn around and buy the stock right back. )t is called the wash rule and it says you can(t sell a stock and buy it back within 6" days and claim a capital loss. )f you sell a stock and buy it back within 6" days, the )B. will disallow the capital loss and you will lose the offset.
Conclusion
)f you are careful you can keep the ta* bite to a minimum, however always seek competent ta* counsel with %uestions about comple* ta* %uestions.