How Does the Stock Market Work? Exchanges, Orders and Prices for Beginners

How does the stock market work? It's the network of exchanges and other trading venues where shares of public companies change hands. A company sells shares once to raise money. After that, investors trade those shares with each other through brokers, and the price moves with what buyers are willing to pay and what sellers are willing to accept.

That's the stock market for beginners in one paragraph. Most explainers stop around there and tell you to buy an index fund. I trade intraday, so this one goes a layer deeper into the plumbing: where a price actually comes from, what happens in the second after you tap buy, and why the number on your screen isn't always the number you get.

Quick Answer

The regular session runs 9:30 a.m. to 4:00 p.m. ET on weekdays. Prices can fall as well as rise, and you can lose money. This is education, not advice. Lanternfish Robotics, the company in the examples, is made up, and so are its prices.

What Is a Stock, and Where Does It Trade?

Investor.gov keeps it short: stocks are "a type of security that gives stockholders a share of ownership in a company." Own one share of a company with a million shares outstanding and you own one millionth of it. Common stock usually comes with a vote at shareholder meetings and a claim on dividends if the company pays any. That's the regulator's definition of a stock. You make or lose money in two ways: the price changes while you hold it, and some companies pay dividends.

Primary market vs secondary market

Shares get created once and traded many times. The primary market is where "newly issued securities are sold to investors and the issuer receives the proceeds." An IPO, when a company first sells shares to the public, is the famous example. That's how companies use the market to raise money for factories, hiring or paying down debt.

The secondary market is where "existing securities are bought and sold." When you buy 10 shares of a company that went public years ago, the company gets nothing. The money goes to whoever sold you those shares. In everyday speech, "the stock market" means this part. It gives investors a place to sell when they want out (liquidity) and puts a constantly updated price on every listed company (price discovery).

Exchanges are only part of the picture

The best-known US stock exchanges are the New York Stock Exchange and Nasdaq. A company lists its shares on one exchange, and that's the venue name you see next to the ticker. Trading is electronic now. NYSE still has a floor, but the matching of buyers and sellers is done by computers.

The part most beginner guides get wrong: a stock listed on one exchange doesn't only trade there. The same shares can change hands on other exchanges, with market makers, on electronic communication networks (ECNs), on alternative trading systems (ATSs, which include dark pools), or inside a broker's own firm. Smaller companies that don't list on an exchange at all trade over the counter (OTC), with different requirements from an exchange listing and usually much thinner trading. So "the stock market" is a web of venues, all quoting the same stocks.

You trade through a broker

You can't walk up to an exchange and buy a share. Retail investors open an account with a broker-dealer, which places orders on their behalf and holds the shares for them. Your broker is the one deciding which of those venues gets your order, which matters more than it sounds. More on that in a minute.

How Is a Stock Price Set?

"Supply and demand" is true but not very useful when you're staring at an order ticket. The mechanism is two numbers. The bid is the highest price a buyer is currently willing to pay. The ask (or offer) is the lowest price a seller will currently accept. The gap between them is the spread. A trade happens when someone is willing to cross that gap, a buyer paying the ask or a seller hitting the bid. More buyers stepping up pushes the bid and ask higher. More sellers pushes them lower. That's supply and demand at the level you actually trade.

Say Lanternfish Robotics last traded at $25.00. Right now the bid is $24.98 and the ask is $25.03, with 300 shares offered at that ask. The big number on your screen says $25.00, but that's history. It's where two people already traded. A market buy for 100 shares will most likely fill at or near $25.03, and a market sell at or near $24.98. Investor.gov says it plainly on its page on types of orders: "the last-traded price is not necessarily the price at which a market order will be executed."

Two more things fall out of that example. Buying at $25.03 and selling straight back at $24.98 costs you the $0.05 spread on every share, so $5.00 on 100 shares before the stock moves a cent. And quotes only hold for a certain number of shares. Try to buy 1,000 at market when only 300 are offered at $25.03, and the rest can fill at worse prices further up the book. The full breakdown of how the bid-ask spread costs you goes through tight and wide spreads in detail.

Market orders and limit orders

Two order types cover most of what a beginner needs. A market order says "fill me now". It almost always executes in a liquid stock, but the price isn't guaranteed. A limit order says "fill me at this price or better". The price is protected, but the fill isn't guaranteed, because the market may never come to your price. The guide to choosing between market and limit orders covers when each one makes sense, and the rundown of stop, stop-limit and bracket orders covers the rest of the menu.

Why prices move at all

The bid and ask move because people change their minds about what a share is worth. The usual reasons:

• Earnings and company news. A quarterly report, a guidance change, a product launch, a lawsuit, an executive leaving.
• Interest rates and inflation. Higher rates make borrowing pricier and make future profits worth less today.
• Economic and political news. Jobs data, tariffs, elections, wars. Anything that changes the outlook for many companies at once.
• Flows. Big funds buying or selling, index changes, forced selling. Large orders move price regardless of the news.
• Sentiment. Fear and greed. Rising prices pull in buyers, falling prices push out sellers, and it feeds on itself.

How much and how fast a stock moves on any of that is its volatility. The explainer on volatility and why it changes your position size covers that properly.

What Happens When You Tap Buy?

This is the bit I didn't understand for longer than I'd like to admit. Most guides say "your broker sends the order to the exchange" and move on. That's one option out of several. The SEC's and Investor.gov's own pages describe the path like this.

1. Your broker picks a venue

Investor.gov's page on how an order gets executed puts it neatly: "Just as you have a choice of brokers, your broker generally has a choice of markets to execute your trade." The choices are the exchange the stock lists on, another exchange, a market maker ("a firm that stands ready to buy or sell a stock listed on an exchange at publicly quoted prices"), an ECN, which is common for limit orders, or another division of the broker's own firm. That last one is called internalization. Your order can also land on an ATS, a trading system that meets the legal definition of an exchange but runs under an exemption instead of registering as one.

2. The broker owes you best execution

Your broker can't just send the order wherever it likes. Under FINRA Rule 5310 on best execution, a broker has to "use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions." Price isn't the only factor. Speed and the likelihood of getting filled count too. Sometimes the venue fills you at a better price than the quoted ask, which is called price improvement. It's an opportunity, not a promise.

3. Payment for order flow

This is one way zero-commission trading gets paid for. Some market makers pay brokers for sending retail orders to them. That's called payment for order flow, and it's legal and disclosed. The market maker earns money on the spread and on the volume. The open question people argue about is whether that arrangement tempts brokers to route for the payment rather than for your price. Best execution still applies either way, and brokers publish routing reports showing where their orders go.

4. The trade clears and settles

Once your order meets a seller, you get a fill and a confirmation, often almost instantly in a liquid stock. (There's no SEC rule that says it must happen within a set time, though. In a thin stock a limit order can sit unfilled all day.) Behind the scenes, a clearing corporation, the National Securities Clearing Corporation (NSCC), compares and clears the trade, and a depository, the Depository Trust Company (DTC), updates the ownership records. Investor.gov lays out who does what on its market participants page.

Settlement is when the cash and the shares officially swap. Some older explainers still say T+2. That's out of date. The SEC moved most broker-dealer trades to T+1, one business day after the trade date, with a compliance date of May 28, 2024. Buy on a Monday, and it settles Tuesday, as long as Tuesday is a business day.

Everyone involved, on one page:

Most of that table is invisible to you, and that's fine. The two rows that touch your results directly are the broker (where your order goes, and at what price it fills) and the spread you pay to whoever is on the other side.

Market Hours, Indexes and Who Polices It

When the market is open

The regular session on the major US exchanges runs 9:30 a.m. to 4:00 p.m. Eastern Time, Monday to Friday. NYSE lists its "Core Trading Session" as exactly that on its holidays and trading hours page, along with the US holidays it closes for and the days it closes early at 1:00 p.m. ET.

Trading also happens before the open and after the close, in extended sessions. When those start and stop depends on the venue and your broker. Even NYSE's own markets list different early session start times, so there isn't one "premarket time" for the whole market. Fewer people trade then, spreads tend to be wider and prices jump around more. The guide to trading before the opening bell and the walkthrough of the post-close session cover the times and the traps.

What "the market is up" actually means

When a news anchor says the market is up, they mean an index went up. Investor.gov defines a market index as "a measurement of the performance of a specific 'basket' of stocks considered to represent a particular market or sector of the U. S. economy," and gives the Dow Jones Industrial Average, an index of 30 large US companies, as its example. Others, like the S&P 500 and the Nasdaq Composite, track hundreds or thousands of stocks.

An index is an average, so it hides a lot. A single stock can drop 8% on a day the index rises, and plenty of stocks run hard while the index falls. Long stretches of index gains or losses get the bull and bear labels, which the explainer on bull and bear markets covers, including the 20% convention.

Who polices it

Two bodies matter for a beginner. The SEC is the federal regulator of the US securities markets. Its stated mission is "protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation." FINRA is a self-regulatory organization, not a government agency, that supervises brokerage firms under the SEC's oversight. If you want to check out a broker before handing it money, FINRA is where you look.

Is Trading the Same as Investing?

Same market, same stocks, same order types. Different game. An investor buys a piece of a business and holds it for years. A trader takes shorter positions to profit from price moves, and cares a lot more about spreads, fills, session times and the chart. Most beginner guides mention trading only to warn you off it. What actually differs:

The row that surprises people is costs. A long-term investor might pay the spread a handful of times in a decade. A day trader crosses it on the way in and on the way out of every trade, maybe dozens of times a week, so the $0.05 on Lanternfish Robotics stops being a rounding error. That's why traders obsess over order types and liquid stocks. If you're curious about the trading side, the honest starter guide to day trading covers what it takes, the comparison of scalping, day trading and swing trading lays out the holding periods, and the explainer on margin accounts covers borrowing, shorting and the extra rules.

The risk, stated plainly

You can lose money in the stock market. Part of it, or all of it if a company fails. Prices can drop sharply in a day, and large single-year drops in the whole market have happened. No return is guaranteed, and anyone quoting you a yearly percentage is describing the past, not your future. Spreading money across many companies, for example through a broad fund, lowers the damage any single company can do. It doesn't remove market risk. Trading adds its own layer: frequent costs, fast moves against you, and the very human habit of turning a small loss into a big one. Borrowed money (margin) makes all of it bigger.

How a Beginner Reads a Stock Chart

Everything above connects to the chart in one sentence: a price chart is a record of trades that already happened. Each candlestick summarizes every trade in one time window, whether that's one minute, five minutes or a day. It shows four prices: where trading opened, the highest and lowest trades, and where it closed. Volume bars underneath count how many shares changed hands in that window.

This 5-minute Lanternfish Robotics candle opened at $25.10, traded as high as $25.60 and as low as $24.90, and closed at $25.45. It closed above where it opened, so it's drawn green. The thin lines (wicks) show where price went and got pushed back. The upper wick says buyers pushed it to $25.60 and sellers sent it back down before the bar ended. The lower wick says it dipped to $24.90 at some point in the bar and buyers took it back.

Two things to keep straight. The chart shows past trades. The bid and ask show where the next trade can happen. They usually sit close together in a liquid stock, but in a thin one the last candle can look very different from the price you'd actually get. And if your chart shows premarket or after-hours bars, those come from much thinner trading, so a big candle at 7 a.m. may represent a few hundred shares. The beginner's guide to candles, trends and volume takes it from here, and the momentum trading playbook shows what traders look for once they can read the bars.

What a Chart Grade Sees, and What It Doesn't

SnapPChart grades one chart screenshot for momentum continuation, long or short. It reads the candles, EMAs, VWAP, MACD and volume visible in the image, and it can read the ticker label on the chart. When a setup qualifies, you get a grade and, on full analyses, an entry, a stop with the reasoning behind it, and targets. When it doesn't, you get told why, which is usually the more useful answer.

Everything earlier in this post happens outside it. It isn't a broker. It doesn't place or route orders, see the order book or the live bid and ask, know where your broker sends your order, or read the news. It doesn't know the state of the market beyond what's drawn in your screenshot. The order ticket, the venue, the spread and the fill all stay between you and your broker.

The split is simple. Learn the plumbing so you know what you're paying for each trade. Then grade the chart before you click buy, because the most expensive trade is usually the mediocre one you took anyway. If you want the wider view of what AI can and can't read from a chart, there's an overview of AI chart analysis and a longer look at how AI fits into trading.