How buying and selling actually works
Behind every trade there is a buyer, a seller and a price they agree on.
Exchanges: the marketplace
Shares trade on stock exchanges, which match buyers with sellers. In the US, the two biggest are the New York Stock Exchange (NYSE) and Nasdaq. Regular trading runs from 9:30 a.m. to 4:00 p.m. Eastern Time on weekdays, except holidays. Other countries have their own exchanges, like London, Tokyo or Mumbai.
You don't go to the exchange yourself. You use a broker, an app or firm that sends your order to the market. For every share you buy, someone else is selling it.
Bid and ask
At any moment, buyers post how much they will pay (the bid) and sellers post how much they want (the ask). The ask is a bit higher than the bid. The gap is the spread.
For huge, popular companies the spread is often just a cent. For small or rarely traded stocks it can be much wider, which is a hidden cost when you trade.
Market vs limit orders
A market order says: buy or sell right now at the best available price. It almost always fills fast, but in a fast-moving market the price you get can differ from the price you saw.
A limit order says: buy only at this price or lower (or sell only at this price or higher). You control the price, but the order may never fill if the market doesn't reach your limit.
A stock shows: bid $50.00, ask $50.05. A market buy order for 10 shares would typically fill around the ask: 10 x $50.05 = $500.50.
If you sold immediately with a market order, you'd get around the bid: 10 x $50.00 = $500.00. Even though the price didn't move, you'd be down $0.50. That's the spread.
A limit buy at $49.90 would wait. It fills only if a seller agrees to $49.90 or less.
Key terms
- Bid
- The highest price a buyer is currently willing to pay.
- Ask
- The lowest price a seller is currently willing to accept.
- Spread
- The gap between the bid and the ask; a small cost of trading.
- Market order
- An order to trade right away at the best available price.
- Limit order
- An order to trade only at a chosen price or better.
Market orders prioritise speed; limit orders prioritise price.