How Does the Stock Market Work?
How buy and sell orders get matched, the role of exchanges and brokers, and why prices update in real time.
⏱️ ~7 min read
Key Takeaways
- Exchanges are electronic marketplaces that match buyers and sellers
- Brokers route your orders to exchanges (or other venues) on your behalf
- The 'price' you see is the last price at which a trade actually happened
- Market makers and other liquidity providers help ensure there's usually someone on the other side of your trade
The market is a giant matching engine
At its core, a stock exchange is a marketplace where buy orders and sell orders for the same security are matched against each other. Exchanges like the NYSE and Nasdaq operate enormous electronic systems that process millions of these matches every day, almost instantly.
Every order has a price and quantity attached. The exchange maintains an 'order book' for each stock — a running list of buy orders (bids) ranked from highest to lowest price, and sell orders (asks) ranked from lowest to highest. A trade happens whenever a bid and an ask meet at the same price.
Your broker is the middleman
When you tap 'Buy' in a brokerage app, your order doesn't go straight to the NYSE. Your broker routes it — often through a market maker or directly to an exchange — where it's matched against existing orders. This typically happens in a fraction of a second.
Brokers are regulated intermediaries (in the US, registered with FINRA and the SEC) that hold your account, execute your orders, and report the resulting trades back to you. Most retail brokers now offer commission-free trading on US stocks and ETFs, making their money instead from things like interest on uninvested cash, payment for order flow, and premium services.
Bid, ask, and the spread
At any moment, a stock has a 'bid' price (the highest price someone is currently willing to pay) and an 'ask' price (the lowest price someone is currently willing to sell for). The difference between them is called the bid-ask spread.
Example: Reading a quote
Suppose a stock shows: Bid $50.10 × 200 shares, Ask $50.12 × 150 shares.
If you place a 'market order' to buy, you'll likely pay around $50.12 (the ask).
If you place a 'market order' to sell, you'll likely receive around $50.10 (the bid).
The 2-cent difference is the spread — a small built-in cost of trading that tends to be larger for less-traded ('illiquid') stocks.
Who's on the other side of your trade?
It might feel like you're trading against 'the market,' but every trade has a specific counterparty — another investor, a fund, or a market maker. Market makers are firms that continuously post both buy and sell quotes for a stock, profiting from the small spread while providing liquidity so that ordinary investors can buy or sell quickly without waiting for a matching order to show up naturally.
Settlement: when the trade actually 'completes'
When your order executes, you own the shares (or have sold them) immediately from an economic standpoint — the price is locked in. But the official transfer of ownership and cash, called settlement, currently takes one business day after the trade (referred to as T+1) for most US stock trades. This matters mostly for things like how quickly proceeds from a sale become available to withdraw or reinvest.
Frequently Asked Questions
Is the stock market open 24/7?+
No. The main US trading session runs 9:30 a.m. to 4:00 p.m. Eastern Time on business days. Many brokers also offer limited pre-market and after-hours trading, but volume and liquidity are much lower during those windows.
Why do stock prices change even when I'm not trading?+
Because thousands of other investors are continuously placing orders based on new information, changing opinions, and shifting supply and demand — the price you see reflects the most recent trade among all of those participants.
Do I need to understand order books to invest?+
No. For long-term investors using simple market or limit orders, the underlying matching mechanics happen automatically. Understanding the basics just helps you interpret what you see and make more informed order choices.