The Basics - Intro to the Markets
How the Stock Markets Work
When you place an order to buy or sell a stock or exchange‐traded fund (ETF), your brokerage firm sends it to a stock market. Once the trade goes through — and it may take just a few seconds for a market order — your account usually updates immediately.
The order might go to a traditional exchange like the New York Stock Exchange (NYSE), where brokers representing buyers and brokers representing sellers bid against each other on an actual trading floor. Nowadays, the order is more likely to go to an electronic market, actually an interconnected network of computers, where market makers compete by posting the specific price at which they're ready to buy or sell 100 shares of a particular security. Trades are matched electronically.
The other major U.S. stock exchange, the NASDAQ, was the first totally electronic investment market, which started a trading revolution around the world. Now, even at the NYSE, most orders are handled on its electronic network rather than on its trading floor. Why? It's faster and cheaper.
Some trades occur in the over‐the‐counter market, or OTC for short. Orders are sent there if the stock is publicly traded but isn't listed on an exchange. Often, a stock doesn't qualify for listing because too few shares have been issued or the share price is too low.
A stock or ETF has a market price, which usually changes each time it's traded. Checking online, you can find the opening, or first price of the day; the last, or closing price; and the real‐time price of the most recent transaction. You can also look up the stock's high and low prices over the most recent 52 weeks. Market prices reflect supply and demand. If buyers are eager, demand rules and the price goes up. If sellers want out, supplies increase and the price goes down. The actual change is often small — a few cents over the course of a trading session — especially in the case of ETFs. But a stock's price may move by several dollars in a trading day, or even more. A change of more than 5 percent in a day gets attention.
Shifting investor demand may be the result of news — good or bad — about the company that issued the stock, some significant change in the sector to which the company belongs, or plain old speculation. If you place a market order during trading hours, it's filled at the best price that's available when the trade is executed, or takes place. If you place an order when the markets are closed, it will be handled when the market opens.
- If you're buying, it's the lowest price at which a broker or market maker offers to sell. That's the ask, or ask price.
- If you're selling, it's the highest price at which a broker or market maker offers to buy. That's the bid, or bid price.
- The difference between the ask and the bid is called the spread.
While the trade price may turn out to be close to what you expected, it could also be significantly higher or lower so you may end up paying more, or getting less, than you wanted.
That's true with some stocks because their prices are volatile, which means they change quickly and sometimes dramatically within a short time. When trading is active, volume increases. The pace picks up. Prices can change even more quickly. And the spread generally gets larger.
If your order is for more than 100 shares, the amount you pay is often the average price of enough 100‐unit transactions to fill your order — though the difference among them may be just pennies.