You click "buy" on your phone and suddenly you own a piece of Apple or Tesla. But what actually happens behind the scenes? Understanding how the stock market works will make you a better investor. Let us walk through the entire process.
The Basic Flow: From Your Click to Owning Stock
When you place an order to buy stock, here is what happens in milliseconds:
- You enter your order in your brokerage app
- Your broker sends the order to an exchange or market maker
- The order gets matched with someone selling
- The trade executes and settles
- You now own the shares
Fun fact: Modern stock trades happen in microseconds. The entire process from clicking buy to owning shares takes less time than it takes to blink your eye.
Stock Exchanges: Where Trading Happens
Stock exchanges are centralized marketplaces where buyers and sellers meet. The two biggest in the US are:
New York Stock Exchange (NYSE)
The NYSE is the largest stock exchange in the world by market capitalization. Located on Wall Street in New York City, it lists major companies like Coca-Cola, Disney, and Johnson & Johnson. The NYSE still has a physical trading floor, though most trading is now electronic.
NASDAQ
NASDAQ is fully electronic with no physical trading floor. It is known for listing technology companies like Apple, Microsoft, Amazon, and Google. NASDAQ tends to have more growth-oriented and tech-focused companies.
Order Types: How You Tell the Market What You Want
When you buy or sell stock, you need to specify how you want the trade executed. Here are the main order types:
Market Order
A market order executes immediately at the best available price. You are guaranteed to get the trade done, but not guaranteed a specific price. Use market orders when you want to buy or sell right now and the exact price does not matter much.
Market Order Example
You place a market order to buy 100 shares of Apple when the price shows $150. Your order executes at $150.02 because the price moved slightly before your order was filled. You got the shares, but paid a tiny bit more than expected.
Limit Order
A limit order only executes at your specified price or better. You control the price, but there is no guarantee the order will fill. Use limit orders when you want a specific price and are willing to wait.
Limit Order Example
Apple is trading at $150 but you only want to pay $148. You place a limit order to buy at $148. If Apple drops to $148, your order fills. If it never drops that low, your order never executes.
Stop Order
A stop order becomes a market order when the stock hits a certain price. Traders use stop orders to limit losses or protect profits.
Stop-Limit Order
Combines features of stop and limit orders. When the stop price is hit, a limit order is placed instead of a market order.
The Bid-Ask Spread
Every stock has two prices at any moment:
- Bid price: The highest price someone is willing to pay to buy
- Ask price: The lowest price someone is willing to accept to sell
The difference between these is called the spread. For popular stocks like Apple, the spread might be just one penny. For less popular stocks, it could be much wider.
Bid-Ask Example
Apple shows: Bid $150.00 / Ask $150.01
If you buy with a market order, you pay $150.01 (the ask). If you sell with a market order, you get $150.00 (the bid). The one-cent difference is the cost of immediate execution.
Market Makers and Liquidity
Market makers are firms that always stand ready to buy or sell stocks. They provide liquidity, meaning they make it easy for you to trade whenever you want.
Market makers profit from the bid-ask spread. They buy at the bid and sell at the ask, pocketing the difference. In exchange, they take on the risk of holding inventory and ensure there is always someone to trade with.
Trading Hours
US stock markets have specific trading hours:
- Regular hours: 9:30 AM to 4:00 PM Eastern Time, Monday through Friday
- Pre-market: 4:00 AM to 9:30 AM Eastern Time
- After-hours: 4:00 PM to 8:00 PM Eastern Time
Markets are closed on weekends and major holidays like Christmas, Thanksgiving, and Independence Day.
Pre-market and after-hours trading have less liquidity, wider spreads, and more volatility. Most beginners should stick to regular trading hours.
Settlement: When You Actually Own the Stock
When your trade executes, you do not technically own the shares immediately. Settlement is the process of officially transferring ownership and money.
In the US, stock trades settle on T+1, meaning one business day after the trade. If you buy on Monday, settlement happens on Tuesday. Until settlement, your broker fronts you the shares.
What Moves Stock Prices?
Stock prices change based on supply and demand, which is influenced by:
Company-specific factors:
- Earnings reports and financial results
- New product launches
- Management changes
- Mergers and acquisitions
- Legal issues or scandals
Market-wide factors:
- Interest rate changes from the Federal Reserve
- Economic data like jobs reports and GDP
- Inflation numbers
- Geopolitical events
- Overall investor sentiment
The Role of Your Broker
Your broker acts as the middleman between you and the market. They:
- Hold your account and money
- Route your orders to exchanges
- Provide research and tools
- Handle regulatory requirements
- Keep records of your trades for taxes
Most brokers now offer commission-free trading on stocks. They make money through payment for order flow, interest on cash balances, and premium services.
Circuit Breakers: Market Safety Nets
To prevent panic-driven crashes, stock markets have circuit breakers that temporarily halt trading when prices drop too fast:
- Level 1: 7% decline in the S&P 500 triggers a 15-minute trading halt
- Level 2: 13% decline triggers another 15-minute halt
- Level 3: 20% decline halts trading for the rest of the day
These were triggered during the March 2020 COVID crash when markets dropped rapidly.
Track Every Trade Automatically
Pro Trader Dashboard connects to your broker and tracks all your trades. See your performance, win rate, and learn from your trading history.
Summary
The stock market is a complex system that matches buyers and sellers in milliseconds. Understanding order types, the bid-ask spread, and market mechanics will help you trade more effectively. Remember to use limit orders when price matters, stick to regular trading hours as a beginner, and always have a plan before you click buy or sell.
Want to learn more? Read our guide on stock exchanges or learn about market indexes.