When you buy a share, you buy an ownership interest in a company. The stock market is the network that lets investors trade those interests. To understand how it works, follow a share from the company that issues it to the order you place with a broker.
When the company gets paid
In the primary market, a company can raise money by issuing new shares. An initial public offering, or IPO, is one way a company can offer shares to the public for the first time. An IPO can include both newly issued shares and shares sold by existing owners. The company receives proceeds from new shares it sells. Existing owners receive proceeds from shares they sell.
After shares begin trading, most transactions take place in the secondary market. When you buy an existing share from another investor, the purchase money generally goes to the seller. The issuing company does not receive a new payment every time that share changes hands.
What happens when you place an order
Your broker receives your instruction and routes it for execution. A trade can execute on an exchange or through another trading venue or firm. A company’s listing exchange and the venue where your order executes can differ. The broker’s trade confirmation tells you what actually filled and at what price.
A market order seeks execution at available prices, which can change before the order fills. A limit order sets the most you will pay on a purchase or the least you will accept on a sale. It can fill at the limit or a better price, fill only partially, or remain unfilled.
Read the bid, ask, and last price
Imagine a fictional stock with a $24.90 bid, a $25.00 ask, and a last trade of $24.95. The bid is what a buyer is currently offering, the ask is what a seller is currently requesting, and the last price reports a trade that already happened. The $0.10 difference between the bid and ask is the spread.
A market buy might start filling near $25.00 if enough shares are available at that price. A buy limit of $24.90 waits for a seller willing to trade at $24.90 or lower. Seeing that price on a chart does not guarantee your order filled. Other orders may be ahead of yours, or too few shares may be available.
Why prices move
Every completed trade has a buyer and a seller. Prices rise when buyers are willing to pay higher prices or sellers withdraw lower offers. Prices fall when sellers accept lower bids or buyers withdraw higher bids. Earnings, interest rates, and changes in expectations can all influence those decisions. A thinly traded stock can move sharply on a relatively small order because fewer shares are available near the current price.
How indexes fit in
An index tracks a defined basket of securities according to published rules. The S&P 500 and Dow Jones Industrial Average track different baskets and use different weighting methods, so they can move differently on the same day. A fund can seek to track an index. The index itself is a measurement, and a fund has its own expenses and trading characteristics.
Try reading an order ticket
Choose a hypothetical stock and write down the bid, ask, and last trade. Then decide which price you would use to estimate the cost of a market buy and where you would place a buy limit if you were willing to wait. In a simulated trade, record whether the order filled and compare the execution price with your estimate. That exercise connects the quote, the order instruction, and the actual fill.
Before you compare a simulated fill with a real quote, check the quote timestamp and whether the market is in its regular session. A delayed quote can make a fill look surprising even if the order executed as instructed. Also check how many shares filled. A 100-share order can fill in smaller pieces at different prices, so compare the average execution price and total cost on the confirmation rather than relying on a single number from a chart.
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