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How the Stock Market Actually Works

The Stock Market for Beginners • Beginner Investing • 6 min

Strip away the tickers and flashing red-and-green numbers, and a stock exchange is a genuinely simple thing: a marketplace where people who want to buy shares and people who want to sell shares meet, and a price gets set by whichever offers actually match. Every buyer states a "bid" — the price they're willing to pay — and every seller states an "ask" — the price they're willing to accept. When a bid and an ask meet at the same number, a trade happens, instantly, and that trade price becomes the stock's new quoted price.

Today this all happens electronically, at enormous speed, across major U.S. exchanges like the New York Stock Exchange (NYSE) and the Nasdaq. Millions of these bid/ask matches happen every single trading day, which is why a stock's price can shift constantly, sometimes many times per second, as new information and new orders continuously reshape the balance between buyers and sellers.

Insider Angle: the NYSE's history goes back to 1792, when 24 New York stockbrokers signed the Buttonwood Agreement under a buttonwood tree on what's now Wall Street, agreeing on basic rules for trading securities with each other. Nasdaq, founded in 1971, took a completely different approach from the start: rather than a physical trading floor with people shouting orders, it was the world's first electronic stock exchange, matching buyers and sellers through a computerized quotation system. That electronic-first model Nasdaq pioneered is essentially how all major exchanges function today, including the NYSE, which has largely moved on from its old floor-trading image.
Try This: Look up the current bid and ask price for any stock you're curious about (most free stock-quote sites show both). Calculate the spread between them, and notice whether it's a large or small gap relative to the stock's price.
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