How is a trade made?

Cheat Sheet:

  • These days, most stocks are traded electronically.
  • The “bid” is the price an investor is willing to pay to buy a stock.  
  • The “ask” is the price a seller wants for the stock he or she is selling.
  • When the bid and ask are matched, a trade results.

So, you’ve done your research, have a good feeling about a stock you want to buy, and are ready to place the trade. You select the stock, hit purchase and … what happens next exactly? In the movies, we see sweaty brokers crying out to each other on the floor of the New York Stock Exchange, red in the face and haggling over prices. The truth is that most of the stocks that we buy and sell are traded electronically. It provides an efficient (and less sweaty) supply and demand system.

Here’s how it works: when you place a trade for the current market price of a stock, you are placing a bid. On the opposite end, someone is selling at the current market price, called an ask. The bid and the ask are determined by the current supply and demand for that particular stock. Electronic matchmakers in the market set you up like Tinder of the finance world. All of a sudden, you have a match, and the stock you bought (or the cash, if you’re selling) shows up in your account!

Just to be clear, floor brokers still play a significant role in the stock market, but instead of trading for you and me, they mainly place trades for big banks, high net worth individuals, and institutions. And they only operate at the New York Stock Exchange, while an exchange like NASDAQ (which houses lots of the tech stocks that we love) is purely electronic.

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