How the Stock Market Works Part I: Exchanges

  by Tyler Curtis

by Tom Doan

The Snider Investment Method utilizes purchasing stocks and selling options like many other investment strategies.  The moment an investor buys shares at market price, like magic, the shares usually appear in the account almost instantaneously.  Many people accept the magic behind the process and move on.  However, behind the scenes there is a lot more going on than a sprinkle of magic dust and whispers of abracadabra.  There are many parts on the back end, from the exchanges, brokers, specialists, and market makers.  This article will focus on the exchanges.

A stock exchange such as the Nasdaq or New York Stock Exchange serves as a market where securities and other financial instruments are traded.  Each exchange is similar to a supermarket where buyers (grocery shoppers) and sellers (food companies such as Kraft, Nabisco, etc.) meet to trade.  When you place a trade to buy shares of stock ABC (apples), you walk into the produce section and find the apples for $1.50 per pound.  If you place a market order, you are accepting the market price and will buy the shares accordingly.

However, some people will place limit orders and only buy if they can get a specified price or better.  As a result, those who place market orders will buy the apples at whatever price is listed and others who place limit orders will only grab the apples if the order was placed with a $1.50 or higher limit.  Without these exchanges and brokers connecting you to them, it would be much more time consuming and difficult although not impossible to buy stock since you would have to find a place to buy apples without the convenience of any supermarkets.  The main difference is that you are able to buy shares in the comfort of your home while you must leave the house to purchase apples.  This is where the role of the broker comes in.

Up next: How the Stock Market Works: Brokers

Join Our Newsletter!
Enter your name & email to have our great content delivered directly to your inbox.  
Your information will never be shared