How does the stock market work?

A stock exchange is a regulated marketplace where people and institutions buy and sell shares (small pieces of ownership in companies). The exchange does not decide prices. It runs the rules, the computer systems and the opening hours, and it publishes every trade so that everyone sees the same prices.

Two markets in one

When a company first sells shares to the public, it is called an IPO (initial public offering), and the money raised goes to the company. From then on, those shares change hands between investors on the exchange. This is the secondary market, and it is what the daily news about “the market” is about. When you buy a share there, the company itself usually gets nothing: your money goes to the investor who sold it.

Buyers, sellers and the order book

Every share has an order book: a live list of who wants to buy and sell, and at what price. A trade happens when a buyer and a seller agree on a price. The price you see quoted is simply the price of the most recent trade.

Two numbers matter most:

• The bid is the highest price any buyer is currently offering.
• The ask (or offer) is the lowest price any seller will currently accept.

The gap between them is the spread. Here is a simplified order book:

Buyers (bid)	Price	Sellers (ask)
	€10.04	300 shares
	€10.02	500 shares
400 shares	€10.00
200 shares	€9.98

Here the bid is €10.00, the ask is €10.02 and the spread is 2 cents. Shares that trade a lot usually have small spreads; rarely traded shares often have wider ones, which is a hidden cost of trading (see investment costs).

Brokers: your way in

Private individuals cannot send orders to the exchange themselves. They go through a broker: a bank or investment firm that is a member of the exchange, or works through one, and passes your orders on. In the EU, brokers must be authorised by a financial regulator; in Portugal that is the CMVM (Comissão do Mercado de Valores Mobiliários) or another EU regulator. The broker also holds the shares for you in an account.

Market orders and limit orders

The two basic ways to place an order:

• A market order says “buy (or sell) now at the best price available”. It is usually carried out at once, but the final price can differ from the one you saw, especially in a fast-moving or rarely traded share.
• A limit order says “buy, but pay no more than €X” (or “sell, but accept no less than €X”). You control the price, but the order may never be carried out if the market does not reach your limit.

A market order gives certainty that the trade happens; a limit order gives certainty about the price. You can’t have both.

Opening hours: Euronext Lisbon as an example

Lisbon’s stock exchange is Euronext Lisbon, part of Euronext, a group that runs several European exchanges including Paris, Amsterdam, Brussels, Dublin, Milan and Oslo. Its main index is the PSI.

Shares on Euronext Lisbon trade on weekdays from 8:00 to 16:30 Lisbon time (9:00 to 17:30 in Paris, which is one hour ahead). Trading does not simply switch on and off: an opening auction collects orders before the start and matches them at a single price, and a closing auction does the same at the end. The exchange follows Euronext’s own holiday calendar, which it publishes each year.

Prices then move as buyers and sellers react to news, results and the economy, which is the subject of what moves the markets.