A stock exchange is simply a marketplace where buyers and sellers of shares are matched. Knowing how that match works demystifies what happens the instant you press "buy".
The primary vs. the secondary market
A company first sells shares to the public in an IPO (initial public offering) — that's the primary market, and the money goes to the company. Everything after that happens on the secondary market, where investors trade those shares with each other. The vast majority of trading you'll ever do is secondary: you're buying from, or selling to, another investor.
How a trade gets matched
Exchanges keep an order book — a running list of who wants to buy and at what price, and who wants to sell and at what price. When the highest a buyer will pay meets the lowest a seller will accept, a trade executes. This happens continuously, in fractions of a second.
Bid, ask and spread
| Term | Plain meaning |
|---|---|
| Bid | The highest price a buyer is currently willing to pay. |
| Ask (offer) | The lowest price a seller is currently willing to accept. |
| Spread | The gap between bid and ask — effectively the cost of trading right now. |
Example: a stock shows a bid of $49.98 and an ask of $50.00. If you buy at the ask and immediately sell at the bid, you'd lose the 2¢ spread. For heavily traded stocks the spread is tiny; for obscure ones it can be large.
Why liquidity matters
A liquid stock has many buyers and sellers, so spreads are narrow and you can trade quickly without moving the price. A thinly traded stock is the opposite — wide spreads and prices that jump on small orders. Liquidity is one quiet reason large, popular companies are easier to own.
