The stock market is a network of exchanges, brokers, and electronic systems where buyers and sellers trade shares of publicly listed companies. When you buy a stock, you’re purchasing a small ownership stake in that company. When you sell, someone else is taking that stake off your hands. The entire system is designed to match these buyers and sellers quickly, determine a fair price, and make sure the money and shares actually change hands.
How a Trade Gets Executed
When you tap “buy” in a brokerage app or place an order by phone, your broker receives that instruction and decides where to send it. That decision happens in fractions of a second, and the order can end up in several places depending on the stock and the type of order you placed.
If the stock is listed on a major exchange like the New York Stock Exchange or Nasdaq, your broker may route the order directly to that exchange. But it doesn’t have to. Your broker can also send the order to a different exchange, to a firm called a market maker, or to an electronic communications network (ECN) that automatically matches buy and sell orders at specific prices. For stocks that trade over the counter rather than on a major exchange, the order goes to an OTC market maker who specializes in those securities.
There’s one more possibility: your broker may fill the order from its own inventory of shares, a practice called internalization. In that case, the broker itself is on the other side of your trade. Brokers are required to seek the best available price for your order regardless of where they route it.
What Market Makers Do
Market makers are firms or individuals that stand ready to buy and sell a particular stock at publicly quoted prices throughout the trading day. They keep the market liquid, meaning you can almost always find someone willing to trade with you, even if no other individual investor happens to want the opposite side of your trade at that exact moment.
A market maker quotes two prices at all times: a bid price (the price they’ll pay to buy shares from you) and an ask price (the price they’ll charge to sell shares to you). The ask is always slightly higher than the bid. That gap is called the bid-ask spread, and it’s how market makers earn revenue. If a stock has a bid of $100 and an ask of $100.05, the market maker pockets that five-cent difference on each share. Five cents sounds tiny, but across millions of shares traded daily, it adds up.
Market makers take on real risk. They’re required to keep quoting prices and trading even when markets turn volatile, which means they sometimes buy shares that immediately drop in value. The spread compensates them for that risk.
How Stock Prices Are Set
A stock’s price at any given moment reflects the most recent price a buyer and seller agreed on. This process, called price discovery, is driven primarily by supply and demand. When more people want to buy a stock than sell it, the price rises. When sellers outnumber buyers, it falls.
But what makes people want to buy or sell in the first place? Several forces are at work:
- Company fundamentals: Earnings reports, revenue growth, management quality, competitive position, and future product plans all shape what investors think a company is worth.
- Economic conditions: Interest rates, inflation, employment data, and broader economic health influence how much investors are willing to pay for stocks in general.
- New information: Any fresh news, whether it’s a quarterly earnings surprise, a regulatory change, or a geopolitical event, can shift what buyers and sellers consider a fair price. Markets react to new information quickly, often within seconds.
- Investor psychology: Fear, greed, and herd behavior all play a role. Prices sometimes move beyond what fundamentals alone would justify because enough people are buying or selling based on momentum or emotion.
Price discovery is continuous. Every trade throughout the day updates the market’s collective opinion of what a stock is worth.
What Happens After You Trade
Clicking “buy” feels instant, but the behind-the-scenes process of transferring money and shares between parties takes a bit longer. This process is called settlement. As of May 2024, the standard settlement cycle for most securities is T+1, meaning one business day after the trade date. If you buy shares on a Monday, settlement happens on Tuesday.
During settlement, your brokerage firm must receive your payment no later than one business day after the trade executes. If you’re selling, you must deliver the shares to your broker within the same window. In practice, if you’re using a standard brokerage account, this all happens automatically. You’ll see the stock in your portfolio right away, but the official transfer of ownership and funds wraps up the following business day.
The settlement system exists to reduce risk. It gives all parties a brief window to confirm the details and move the actual assets. Before May 2024, the standard was T+2 (two business days). The shift to T+1 reduced the time your money or shares sit in limbo, lowering the chance that something goes wrong between the trade and the final transfer.
Who Regulates the Market
The Securities and Exchange Commission (SEC) is the primary federal agency overseeing U.S. securities markets. Its Division of Trading and Markets establishes and maintains standards for fair, orderly, and efficient markets. The SEC regulates broker-dealers, stock exchanges, and other major market participants.
Working alongside the SEC is FINRA, the Financial Industry Regulatory Authority, a self-regulatory organization that directly oversees brokerage firms and their registered representatives. FINRA writes and enforces rules for brokers, examines firms for compliance, and handles investor complaints. If your broker mishandles a trade or engages in deceptive practices, FINRA is typically the body that investigates.
Stock exchanges themselves also have their own rulebooks. Companies must meet listing requirements to trade on a given exchange, including minimum financial thresholds and ongoing disclosure obligations. This layered regulatory structure is designed to protect investors, ensure transparency, and keep the market functioning smoothly.
Types of Orders You Can Place
Understanding order types gives you more control over the price you pay or receive. The two most common are market orders and limit orders.
A market order tells your broker to buy or sell immediately at the best available price. You’ll almost certainly get your trade filled quickly, but in a fast-moving market, the price you get might differ slightly from the price you saw when you placed the order. This difference is called slippage, and it’s more common with thinly traded stocks that have wider bid-ask spreads.
A limit order sets a specific price. If you place a limit order to buy at $50, your order will only execute at $50 or lower. If the stock never drops to your price, the order goes unfilled. Limit orders give you price certainty but not execution certainty. They’re especially useful when you want to avoid overpaying during volatile trading sessions.
Most brokers also offer stop orders (which trigger a market order once a stock hits a specified price) and stop-limit orders (which trigger a limit order at a specified price). These are commonly used to limit losses or lock in gains on stocks you already own.
How Exchanges and Markets Differ
The New York Stock Exchange and Nasdaq are the two largest U.S. stock exchanges, but they operate differently. The NYSE uses a hybrid model that combines electronic trading with designated market makers on a physical trading floor. Nasdaq is fully electronic, with no trading floor, and relies on a network of competing market makers to facilitate trades.
Beyond these major exchanges, there are also alternative trading systems, sometimes called dark pools, where large institutional investors can trade big blocks of shares without immediately revealing their orders to the public market. These venues exist because a hedge fund trying to sell a million shares on a public exchange would likely push the price down before it could finish selling. Dark pools let large trades happen more quietly, though they’re subject to the same SEC oversight.
For everyday investors buying and selling through a brokerage account, the specific exchange or venue where your trade lands usually doesn’t matter much. Your broker is required to seek the best execution available, and the differences in price across venues are typically fractions of a penny per share.