How does the stock market work?

 

 

Basic stock market operation for beginners:

 

Here is how people buy and trade stocks:

 

 

Every stock is traded on a public market. There are several exchanges

around the world, such as the New York Stock Exchange, NASDAQ, or the Shanghai Stock Exchange.  These exchanges operate in the local time zone of the location. So, the US market will be open during the US day, the Shanghai market is open during the Chinese day (because this is on the other side of the world). More information on market hours can be found here.

 

Basic market operation:

 

  • A person, or party, offers a stock for a price (the offer price)
  • Another party that wants to own a stock will place a bid (an offer)
  • When an offer is higher than a bid, or they meet, the sale happens and the stock transfers (and money exchanges)
  • Typically bids and offers are one or two cents apart ($0.01 or $0.02), so there is not a huge gap here - Stocks that are not traded as often can have much higher spreads
  • Stocks can also be purchased at market (the current offer) price, where the buyer pays the bid price

 

When you price a stock on the market it gives the offer price (what someone is willing to sell for).

 

You can set your own bid (usually good for a day) by selecting to buy at a limit (the price the stock has to hit to execute the order). If you want to offer a stock for a price, you can set a limit on the minimum you will take and the system will automatically execute the order. Additionally, orders can be specified all or none, where you have to get all shares or none - if not specified shares may be filled at prices other than the limit price set (but this is unlikely for non-institutional investors).

 

Quick basic reference for markets

 

Buying

  • Stop --> Execute order when price is above your set price
  • Limit --> Order will be filled when the price is below your set price

 

Selling

  • Limit --> The lowest price you will sell a stock for
  • Stop --> The price your portfolio will automatically sell a stock at (so if the stock drops to this price, then sell)

 

Other market basics

  • All or None --> Specifies if all of the shares must be purchased for the same price, if not selected it will buy the available shares at one price then move to the next bids in the list (and possibly buy shares at a different price).

 

 

Article by Jacob K Lloyd

Jacob@startingwithstocks.com

Published: 2 July 2015

Last updated: 13 Sep 2015

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