Market Basics

A financial market is a place, physical or electronic, where buyers and sellers agree on prices. The price you see on a chart is simply the last price at which a buyer and a seller agreed to trade. Understanding how that agreement happens explains almost everything a beginner finds confusing: why there are two prices, why your order sometimes fills worse than expected and why prices can jump.

Who is in the market#

Every market has the same cast of characters, even if the names change:

• Exchanges and trading venues run the matching system where orders meet. The New York Stock Exchange and Nasdaq are exchanges; crypto has its own, such as Coinbase and Kraken. See Exchanges.
• Brokers connect you to those venues. You send your order to a broker, and the broker routes it to a venue. See How to Choose a Broker.
• Market makers stand ready to both buy and sell, all day, and earn the small difference between the two prices. They are the reason you can usually trade instantly. See Market Makers and Liquidity Providers.
• Investors and traders of every size, from someone buying one share to a pension fund buying millions.
• Clearing houses stand between buyer and seller after the trade so that each side gets paid even if the other fails. See Clearing Houses and Central Counterparties.
• Regulators such as the SEC and CFTC in the United States set the rules.

A short history#

Organized markets began as people meeting in person. In 1792, 24 stockbrokers in New York signed the Buttonwood Agreement, named after the tree on Wall Street they traded under. It set common commissions and grew into the New York Stock Exchange. For most of the next two centuries, trading meant shouting in a crowded room. Today almost all trading is electronic: computers match orders in millionths of a second, and the trading floor survives mostly for television.

The order book: where prices come from#

At the heart of every electronic market is the order book: a live list of everyone waiting to buy and everyone waiting to sell.

• A bid is an offer to buy at a stated price. The highest bid is the best price anyone will pay right now.
• An ask (also called an offer) is an offer to sell. The lowest ask is the cheapest price anyone will sell at right now.
• The gap between the best bid and the best ask is the spread. It gets its own lesson: Bid-Ask Spread.

When someone sends an order that crosses the spread, a trade happens. If you send a buy order at the market price in the book above, you buy from the cheapest seller at $100.02. That trade prints on the chart as the new last price. A moment later, someone sells at market to the best bid at $99.99, and the last price ticks down. This back and forth is why a chart wiggles even when nothing important is happening.

Makers and takers#

There are two ways to participate in the order book:

• Makers place orders that wait in the book, such as a limit order to buy at $99.98. They add liquidity.
• Takers send orders that trade immediately against waiting orders, such as a market order. They remove liquidity.

Many venues pay makers a small rebate and charge takers a small fee. As a trader, you choose which role to play on every order, and that choice is the first real cost decision you make. The full menu of choices is in Order Types Explained.

Liquidity: how easy it is to trade#

A market is liquid when there are many orders close to the current price, so you can buy or sell a reasonable amount without moving the price. Large company stocks, major currency pairs and Bitcoin are very liquid. A small company stock or an obscure token may have only a few orders, far apart.

Liquidity changes during the day. It is usually thinnest right at the open, at the close and overnight. Read Liquidity for how to judge it before you trade.

When markets are open#

Most stock exchanges keep fixed hours. The NYSE's regular session runs from 9:30 a.m. to 4:00 p.m. Eastern time on weekdays, with extended sessions before and after that carry less liquidity (NYSE hours and calendars). Forex trades around the clock from Sunday evening to Friday evening because banks in different time zones take turns. Crypto never closes. See Trading Sessions for why the time of day matters to your fills.

What happens after you trade#

When your order fills, you own the asset immediately for trading purposes, but the official transfer of cash and securities, called settlement, follows later. US stocks settle one business day after the trade (known as T+1) since May 2024. The clearing house guarantees both sides in between, which is why you never have to worry whether the stranger who sold to you will deliver. More detail is in Settlement.

Key takeaways#

• The price on a chart is the last agreed trade, not a fixed value.
• There are always two live prices: the best bid and the best ask.
• Market orders take liquidity and pay the spread; limit orders make liquidity and may not fill.
• Liquidity decides how much your own trading moves the price.

Next, learn exactly what you own when you buy a share in What Is a Stock?, or go deeper on the two prices in Bid-Ask Spread.

Frequently asked questions#

Who sets the price of a stock?#

Nobody sets it directly. The price is the last level at which a buyer and a seller agreed to trade. When more people want to buy than sell at the current price, buyers bid higher and the price rises, and the reverse when sellers are more eager.

What is the difference between an exchange and a broker?#

An exchange runs the system where buy and sell orders are matched. A broker is the company that holds your account and sends your orders to exchanges or other venues on your behalf. Individuals almost always trade through a broker.

Why are there two prices for a stock?#

The bid is the highest price a buyer is willing to pay right now, and the ask is the lowest price a seller will accept. You buy at the ask and sell at the bid. The gap between them is the bid ask spread.

What time does the stock market open?#

The New York Stock Exchange and Nasdaq hold their regular session from 9:30 a.m. to 4:00 p.m. Eastern time on weekdays, with extended sessions before and after. Forex trades around the clock on weekdays and crypto trades every day.

Sources#

• U.S. Securities and Exchange Commission, How stock markets work
• New York Stock Exchange, Hours and calendars
• Wikipedia, Buttonwood Agreement