How does the stock market work?
Who is on the other side of your purchase, and how a price actually gets set.
Two lists, not one price
Picture a market where one side writes 'I'll pay up to €100 for a share' and the other writes 'I won't sell for less than €101'. Nobody moves. There is no trade and no new price.
Then someone agrees to pay €101. That trade happens, and €101 becomes the 'last price' you see on the screen. The price is not some official valuation. It is simply the amount two parties agreed on, the last second anyone agreed.
That is the difference between the ask price, the bid price, and the last price. When you read 'the S&P 500 is at 6,400', you are reading a summary of the most recent trades, not a judgement of what those companies are worth.
Who is on the other side
When you buy, someone is selling. Often it is not a person who thinks you are wrong — it is a pension fund rebalancing, someone paying for a house, or a market maker earning the gap between buying and selling.
Those market makers are the reason you can buy instantly. They always keep both a buy offer and a sell offer open, and earn a few cents on the difference. In exchange, you never have to wait for a genuine buyer to show up.
That difference is called the spread. On a large, heavily traded share it is tiny. On a small, forgotten one it can be several percent — a hidden cost you pay every time you get in or out.
Why market hours exist
Exchanges keep opening hours because liquidity thrives on concentration. If everyone buys and sells during the same hours, there is always someone on the other side, and the spread stays narrow.
When the market is closed, the news does not stop. That is why a share can open noticeably higher or lower than where it closed — all of the overnight news gets squeezed into the first price of the morning.
This is why professionals talk about 'the open' and 'the close' as special moments. They are the two points in the day where most of the attention and most of the volume meet at once.
Key terms in this lesson
- Spread
- The gap between the highest price someone will pay and the lowest price someone will accept.
- Liquidity
- How easily you can buy or sell without moving the price yourself.
- Market maker
- A firm that always keeps both a buy offer and a sell offer open, so you can buy or sell instantly.
Quick check
Why does a small, thinly traded share cost you more to buy and sell than a large one?
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