By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Stock Market Basics: How Trading, Prices, and Orders Work
The stock market is a network of exchanges and trading venues where public company shares trade. Prices move with supply, demand, and expectations.
Stock Market Basics: How Trading, Prices, and Orders Work
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What is the stock market?
- The stock market is a network of exchanges and other trading venues where buyers and sellers trade shares of public companies.
- A share is a small piece of ownership, with a claim on future profits but no promise of any return.
- Brokers route orders to trading venues; most investors never deal with an exchange directly.
- The SEC regulates the securities markets, and FINRA oversees broker-dealers.
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What is the stock market?
- The stock market is a network of exchanges and other trading venues where buyers and sellers trade shares of public companies.
- A share is a small piece of ownership, with a claim on future profits but no promise of any return.
- Brokers route orders to trading venues; most investors never deal with an exchange directly.
- The SEC regulates the securities markets, and FINRA oversees broker-dealers.
How are stock prices set?
- Prices come from matching buy and sell orders; the quoted price is usually the last trade.
- The bid is the highest price a buyer will pay, the ask is the lowest a seller will accept, and the gap is the spread.
- Over time, prices reflect expectations about earnings, interest rates, and risk; day to day they can swing on news and sentiment.
- Market-wide circuit breakers pause or halt trading when the S&P 500 falls 7%, 13%, or 20% in a single day.
What order types can investors use?
- Market order: executes promptly at the best available price, which can differ from the last quote.
- Limit order: sets the most you'll pay or the least you'll accept; it may not execute.
- Stop order: becomes a market order once the stop price is reached, so in a fast market the fill can be worse than the stop.
- Stop-limit order: becomes a limit order at the stop price, controlling price but risking no execution.
When does the market trade and settle?
- Regular trading on major U.S. exchanges runs 9:30 a.m. to 4:00 p.m. Eastern time on business days.
- Extended-hours trading exists but often has less volume, wider spreads, and bigger price swings.
- Since May 28, 2024, most U.S. stock trades settle one business day after the trade date (T+1).
- SIPC protects customers of a failed member brokerage up to $500,000, including $250,000 for cash; it doesn't cover market losses.
What do market cap, indexes, and bull and bear markets mean?
- Market capitalization is share price times shares outstanding.
- An index, such as the S&P 500, tracks a defined basket of stocks; you can't buy an index directly, only funds that track one.
- A bull market is commonly described as a rise of 20% or more, and a bear market as a fall of 20% or more from a recent high.
- Declines of that size have happened repeatedly, and their length and recovery time have varied widely.
What mistakes do new investors commonly make?
- Concentrating in one stock or sector, including an employer's stock.
- Trading often, which adds costs and can turn gains into short-term gains taxed as ordinary income.
- Selling in a panic during declines, or buying mainly because a stock recently rose.
- Using margin or options before understanding how losses can exceed expectations.
Key takeaways
- Stocks are ownership stakes whose prices move with supply, demand, and expectations.
- Order type controls the trade-off between speed and price.
- Trades settle T+1, and SIPC covers broker failure, not investment losses.
- Diversification, low costs, and a plan for downturns address the most common beginner mistakes.
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