What a market is and who trades
A market is any place, physical or electronic, where buyers and sellers meet and agree on a price. Today almost all of it is electronic. When you tap "buy" in a trading app, your order travels through a chain of firms before it meets someone willing to sell. This lesson walks through that chain and explains how a price actually forms.
Exchanges
An exchange is an organised, regulated marketplace that brings orders together and matches them under published rules. Well-known examples are the New York Stock Exchange and Nasdaq for US shares, CME Group for futures, and the London Stock Exchange for UK shares. An exchange does not decide the price. It runs the matching engine, the computer system that pairs buy orders with sell orders, and it publishes the results.
Not everything trades on an exchange. Currencies, many bonds and some derivatives trade over the counter (OTC), meaning directly between banks, dealers and their clients rather than through one central order book.
Brokers
Most individuals can't connect to an exchange directly. They go through a broker, a licensed firm that holds the customer's account, accepts their orders and routes them to a place where they can be filled. The broker also handles the paperwork after a trade: settlement (the actual exchange of cash for the asset), statements and tax records. Brokers earn money through commissions, spreads, interest on cash and margin loans, and in some countries payments from the firms they route orders to. It's worth reading how your own broker is paid.
Market makers
A market maker is a firm that continuously offers to both buy and sell an instrument. At any moment it might be willing to buy a share at $100.00 and sell the same share at $100.02. Market makers provide liquidity: the ability for others to trade quickly without moving the price much. They aim to earn the small difference between their buying and selling prices many times over, while managing the risk of holding positions when prices move against them.
Who else trades
Alongside market makers you'll find pension funds, insurers and mutual funds investing long-term savings; hedge funds; banks; companies hedging business risks (an airline locking in fuel costs, for example); and individual traders and investors. Each has different goals and time horizons, and all of their orders land in the same pool.
The order book
On an exchange, waiting orders sit in an order book: a list of all the prices at which people are currently willing to buy, and all the prices at which people are willing to sell, with the quantity at each price.
Suppose the order book for a hypothetical stock looks like this:
- Sell orders: 300 shares at $100.04, 500 shares at $100.03, 200 shares at $100.02
- Buy orders: 400 shares at $100.00, 600 shares at $99.99, 1,000 shares at $99.98
The highest price anyone is willing to pay right now is $100.00. That is the bid. The lowest price anyone is willing to sell at is $100.02. That is the ask (also called the offer). The gap between them, $0.02 here, is the spread.
How a price forms
No trade happens while buyers and sellers sit apart. A trade happens when someone crosses the spread: a buyer accepts the ask, or a seller accepts the bid. The price of that trade becomes the "last price" you see on a chart.
Two basic order types decide how you take part:
- A market order says "fill me now at the best price available". In the example, a market order to buy 200 shares would fill at $100.02. A market order to buy 1,000 shares would use up all three sell levels, filling 200 at $100.02, 500 at $100.03 and 300 at $100.04. Your average price ends up worse than the first quote you saw. This is called slippage.
- A limit order says "fill me only at this price or better". A limit order to buy at $100.00 joins the queue on the bid side and waits. It may fill, or price may move away and it never fills.
Prices move because the balance of orders shifts. If more people want to buy at the ask than want to sell there, the sell orders at $100.02 get used up, and the ask moves to $100.03, then $100.04. Buyers who want to trade must pay more, and the last price rises. News, economic data or a large fund's orders can change that balance in seconds.
Why the spread matters to you
The spread is a cost you pay every time you trade with a market order. If you buy at the ask and immediately sell at the bid, you lose the spread even though "the price" didn't change. For heavily traded instruments, such as large US shares or major currency pairs, spreads are usually tiny. For thinly traded instruments, outside normal trading hours or during fast-moving news, spreads can widen sharply. Checking the spread before you trade is one of the simplest habits a beginner can build.
Delayed and real-time prices
Many free price feeds, including the one this site uses, are delayed by several minutes. Real-time data from an exchange usually requires a paid subscription through your broker or a data vendor. When you see a price anywhere, it's worth knowing whether it is real-time or delayed, and where it came from. On PYE Markets every figure carries its source and time.
Key terms
- 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 difference between the ask and the bid; a cost paid when trading at market.
- Liquidity
- How easily an instrument can be traded in size without moving its price much.
- Market order
- An order to trade immediately at the best available price.
- Limit order
- An order to trade only at a set price or better; it may not fill.
Next lesson: Lesson 2: Stocks, ETFs and indexes
General education, not investment advice.