Many middle-income workers (e.g., you) have some sort of retirement fund. This retirement fund — whether it be 401(k), IRA, etc. — is invested in order to grow the money. What normally happens at this stage is that your money is invested in stocks, bonds, and commodities in order to grow it.
You are generally given a choice when you open a 401(k) or IRA account. You are given a choice of several investment options, usually in the form of mutual funds or hedge funds. For the purposes of our discussion the differences between the two types of funds are almost none, excerpt perhaps that hedge funds are slightly riskier but have slightly higher growth potential. In both cases, a single fund consists of a collection of stocks, bonds, and/or commodities. Stocks are ownership in corporations; bonds are equivalent to corporations and the government getting a loan from you; and commodities (also known as derivatives) are investments in actual physical objects such as gold and oil in the form of futures and options. Generally speaking, bonds are the most stable form of investment, but has the lowest return on your investment. Stocks and commodities' return rates differ, and will change depending on the market condition, but generally speaking largecap stocks (“bluechip” stocks) are the most stable, and the smallcap stocks have the highest growth potential. International stocks tend to do better when the U.S. economy is doing bad and the dollar prices fall, or when there are high potential growth in the foreign markets. The general consensus among the experts is that younger people (that will not retire for a long time) invest in high-potential funds even if it is risky, because the growth potential over the long-run is higher, whereas those closer to their retirement invest in more stable funds.
What kind of investment options you have available depends on your investment firm with whom you have your 401(k) and IRA account. They will either make the choices for you, or they will hire another firm to make the choices for you. The categories of these investment options (largecap stocks, mediumcap stocks, smallcap stocks, international stocks, bonds, commodities) are usually same across the board; however, what individual stocks will be a part of the “largecap stock fund” depends on the investment firm. The investment firm spends a lot of its resources (money and people) analyzing the best set of investable items to include in these funds, and what specific stocks/bonds/commodities are included these funds change constantly. The people who analyze the market for the best investable items are known as analysts.
Once you make your choice, your investment firm will gather everyone's money, calculate how many stocks/bonds/commodities they will need to buy/sell based on their analysis of the market, and send orders for those items to a broker firm. The investment firm sends the orders to the broker firm depending on their relational ties (e.g., the person who manages your mutual fund went to college with someone at the broker firm) and do not depend too heavily on other criteria, such as the price the broker firm charges the investment firm for the orders.
The broker firm, in turn, will have staff that receives these orders, often via the Internet using a standard financial protocol, but also often via the telephone or the instant messenger as well. The staff at the broker firm that takes care of this sort of work is known as the sales trader and is a highly valued member of the firm because they determine how much money the broker firm will make. The sales trader usually has a personal relationship with someone at the investment firm (e.g., the sales trader went to college with someone at the investment firm) so the amount of order also the sales trader brings into the firm usually follows the sales trader when s/he moves to another firm.
After receiving an order, the sales trader will route the order to an executing trader (a.k.a. “trader”) at the firm who is best fit for the order. For example, if the order is for 1000 share of Microsoft, the order is most likely going to be sent to a trader who knows the Microsoft stock really well, who knows what time during the day is best to buy or sell the stock depending on the market condition or what time Microsoft is expected to make announcements of new products or make its quarterly earnings report.
Once the trader receives the order, the trader can either fill the order from the firm's inventory (fulfill the order by having the broker firm trading with the client), route the order out to the exchange to be filled (i.e., Nasdaq for Microsoft orders,) route the order to another broker firm that is willing to trade with the trader, or route the order to an ECN which allows the trader to announce his order to the world and trade with any other firm that wants to trade with him. How he ultimately trades depends on his analysis of the best way to trade the stock.
The most ideal scenario for a trader is for him to receive two orders of the opposite side. For example, one order to buy 1000 shares of Microsoft (market price), and another order to sell 1000 shares of Microsoft (market price.) The two orders then can be crossed at some reasonable price. This way the trader does not have to go searching for someone to trade with, he can take a commission on both buy and sell orders, and it won't incur any service fees from a third party.
Once an order is executed, either fully (all 1000 shares) or partially (fewer than 1000 shares), an electronic order will cause an electronic notification to go back to the client, the investment firm. If the order was non-electronic (either placed over the phone or instant messenger,) the sales trader will inform the investment firm of how many shares were executed at what price after the day is over or when the order is fully filled.
The above gives a general picture of how stocks are traded and how an average middle-class person is involved in the big picture. The variations do exist, however. For example, a sales trader sometimes works also as an executing trader, in which case he or she may be called a hybrid trader. Also, if you invest in stocks directly via a stock trading service like E*Trade or Ameritrade then there are no analysts or fund managers; instead, you'll be taking over those roles, but E*Trade and Ameritrade will be the investment firm that will route the orders to the broker firms. Occasionally investment firms and broker firms may belong to a single firm, but they may be separate entities within the firm.
