How stock markets work: exchanges, order books, auctions and what moves share prices

A stock market is a set of venues where shares in companies are bought and sold. Companies first sell shares to investors to raise money, and those shares are then traded between investors on exchanges and other electronic venues, where buy and sell orders are matched in an order book. The price you see at any moment is simply the level at which the most recent buyers and sellers agreed to trade, and it changes as new information alters what people are willing to pay.

This guide explains the plumbing: how companies list, what an exchange does, how the order book and auctions set prices, the role of market makers, how trades settle, and the main forces that move share prices. It is written for readers who know the basics of trading, perhaps from forex, and want to understand equities before trading shares or share CFDs. For the wider context, start with what are financial instruments.

Primary and secondary markets

The primary market: raising capital

When a company wants to raise money from the public, it can sell new shares through an initial public offering (IPO). Investment banks help set the price and find buyers, the company publishes a prospectus describing its business and risks, and the shares are admitted to trading on an exchange. Companies can also list through a direct listing (existing shares start trading without new money being raised) or, in some markets, by merging with an already-listed shell company.

Once listed, a company can raise more money later through follow-on offerings or rights issues, where existing shareholders are offered new shares, often at a discount. Companies can also return money by paying dividends or buying back their own shares. Our guide to dividends and corporate actions explains how these affect shareholders and CFD holders.

Listing brings obligations: regular financial reports, disclosure of price-sensitive information, governance standards and, in the EU, rules against market abuse and insider dealing.

The secondary market: trading between investors

After the IPO, almost all trading is between investors. When you buy a share on an exchange, your money goes to the seller, not to the company. The secondary market matters to companies anyway, because the share price affects how cheaply they can raise money in future, how attractive their shares are as payment in acquisitions and how their managers are often paid.

Exchanges and other trading venues

What an exchange does

A stock exchange provides a regulated marketplace with rules for who can trade, how orders interact and what information is published. Well-known examples include the New York Stock Exchange and Nasdaq in the US, the London Stock Exchange, Deutsche Börse's Xetra in Germany, Euronext (which runs markets in Paris, Amsterdam, Brussels, Milan and other cities) and the Tokyo Stock Exchange.

Exchanges also set listing standards for companies, publish real-time and closing prices, calculate or license indices, and run surveillance to detect manipulation. Only member firms can send orders directly to an exchange; retail investors reach it through a broker.

Other venues

Shares are not traded only on their home exchange. In the EU, MiFID II recognises several types of venue:

• Regulated markets, the traditional exchanges.
• Multilateral trading facilities (MTFs), electronic venues that compete with exchanges to match orders in the same shares.
• Systematic internalisers, investment firms that execute client orders against their own book.
• Dark pools and other non-displayed order books, where large orders can be matched without showing them publicly in advance, subject to limits.

In the US, trading is similarly spread across exchanges, alternative trading systems and wholesale market makers, with rules designed to ensure orders receive at least the best publicly quoted price. The practical result in both regions is that liquidity is fragmented across venues, and brokers use routing systems to look for the best available price. EU brokers must have a best execution policy describing how they do this.

The order book

Most trading in liquid shares happens through a central limit order book: an electronic list of all the buy orders (bids) and sell orders (offers or asks) that have been placed but not yet filled.

How orders are matched

• A limit order says "buy up to this price" or "sell at no less than this price". If it cannot be filled straight away it rests in the book.
• A market order says "fill now at the best available price". It takes liquidity from resting limit orders.
• Orders are generally matched by price-time priority: the best price first, and among orders at the same price, the earliest first.

The highest bid and the lowest offer form the best bid and offer, and the gap between them is the spread. Our glossary entries for bid and ask, limit order and market order cover these terms, and our guide to order types explains how they work on a trading platform.

Worked example: reading the order book

Here is an illustrative order book for a share. The numbers are invented for the example.

Offers (sellers):

• 600 shares at 50.06
• 900 shares at 50.04
• 400 shares at 50.03

Bids (buyers):

• 500 shares at 50.01
• 1,200 shares at 50.00
• 800 shares at 49.98

The best bid is 50.01 and the best offer is 50.03, so the spread is 0.02, about 0.04% of the price.

Now suppose a buyer sends a market order for 1,000 shares:

1. The first 400 shares fill at 50.03, exhausting that level.
2. The next 600 shares fill at 50.04, leaving 300 shares at that level.
3. The average price paid is (400 times 50.03 plus 600 times 50.04) divided by 1,000, which is about 50.036.

The buyer paid more on average than the best offer shown, and the new best offer is now 50.04. This is how large orders "walk the book", and why the size you can trade at the quoted price depends on depth, not just the spread. On a thinly traded share, the same market order could move the price much further. Our guide to slippage explained covers the same effect in currency markets.

Tick sizes

Prices move in minimum increments called ticks. In the EU, tick sizes depend on the share's price and liquidity under MiFID II rules, so a heavily traded share may have a finer tick than a thinly traded one at the same price.

Auctions: how the open and close are set

Many exchanges do not start and end the day with continuous trading. Instead, they run call auctions.

• During the auction period, orders are collected but not executed. The exchange publishes an indicative price and volume as orders arrive.
• At the end of the period, the exchange calculates the single price at which the most shares can be traded, and all matching orders execute at that price.

The opening auction absorbs orders that built up overnight, such as reactions to results or news. The closing auction sets the official closing price, which matters because index providers, fund valuations and many benchmarks use it. Index funds and ETFs that need to trade at the close concentrate their orders there, so closing auctions often account for a meaningful share of a day's volume on major European and US exchanges.

Some exchanges also hold intraday auctions, and many use volatility interruptions: if a share's price moves too far too quickly, continuous trading pauses for a short auction before resuming.

Typical exchange hours

Regular trading hours on some major exchanges, in local time:

• New York Stock Exchange and Nasdaq: 09:30 to 16:00 New York time, with pre-market and after-hours sessions outside that window that are thinner and more volatile.
• London Stock Exchange: continuous trading from 08:00 to 16:30 UK time, with an opening auction just before 08:00 and a closing auction just after 16:30.
• Xetra: 09:00 to 17:30 Central European Time, with auctions at the open, around midday and at the close.

Daylight-saving changes happen on different dates in the US and Europe, which briefly shifts the overlap between sessions. Our market hours tool shows exchange hours in your own time zone, including holidays.

Market makers and liquidity providers

A market maker continuously quotes both a bid and an offer in a share, earning the spread and taking the risk of holding inventory in between. Their role varies by market:

• Some exchanges appoint designated market makers or specialists with obligations to maintain orderly quotes in particular shares, sometimes with a role in auctions.
• On order-book markets, market makers and high-frequency liquidity providers compete with everyone else by posting limit orders.
• For less liquid shares, exchanges may use quote-driven or hybrid models where market makers must keep quotes within a maximum spread for a minimum size.

Market makers narrow spreads and add depth, but they are not obliged to absorb unlimited selling at any price. When news hits, quotes can widen sharply or disappear for a moment. Our glossary entry on the market maker covers the term, and note that a "market maker" CFD broker is a different idea: a broker taking the other side of client trades, explained in ECN, STP and market maker execution.

Clearing and settlement

A trade on an exchange is a promise: the buyer will pay, the seller will deliver. Two further steps make it happen.

Clearing

For most exchange trades in Europe and the US, a central counterparty (CCP) steps between buyer and seller. Each side then faces the CCP rather than each other, so if one firm fails, the other's trade is still honoured. CCPs collect margin from their members to cover that risk.

Settlement

Settlement is the actual exchange of cash for shares, recorded at a central securities depository. Settlement cycles are described as T+n, where T is the trade date and n the number of business days later:

• The US moved to T+1 on 28 May 2024, so a share bought on a Monday normally settles on Tuesday.
• The EU, UK and Switzerland currently settle most share trades on T+2 and are scheduled to move to T+1 on 11 October 2027. The EU's change was made law in 2025 through an amendment to the Central Securities Depositories Regulation.

For a retail investor, settlement rarely matters day to day, because brokers usually let you see the position straight away. It matters around dividends, where the ex-dividend date is tied to the settlement cycle, and when you sell and want to withdraw the cash. Share CFDs do not settle in this way at all: they are cash-settled contracts with your broker, as explained in stock CFDs versus real shares.

Where your shares are held

Retail shares are almost always held through a nominee or custodian: the broker, or a company it uses, is the registered holder on behalf of its clients. Client assets must be kept separate from the firm's own, and if an authorised firm fails, an investor compensation scheme may cover eligible clients up to a limit if assets cannot be returned.

Circuit breakers and trading halts

Exchanges have tools to stop disorderly trading:

• Single-stock halts occur when a company is about to release price-sensitive news, when there is uncertainty about its status, or when volatility limits are hit.
• Volatility interruptions in Europe and limit up-limit down bands in the US pause or restrict trading when a share moves outside a band in a short time.
• Market-wide circuit breakers in the US halt all trading for 15 minutes if the S&P 500 falls 7% or 13% from the previous close (before the final 35 minutes of the session), and for the rest of the day at 20%.

Halts protect against disorderly markets but do not protect positions: a share can reopen after a halt at a very different price. For leveraged traders this is the same gap risk found in other markets.

What moves share prices

A share's value, in theory, reflects the present value of the cash its business will generate in future. In practice, prices move when expectations about that future change, or when the rate used to discount it changes.

Earnings and guidance

Listed companies report results quarterly or half-yearly. Analysts publish estimates beforehand, and markets react to the difference between what was expected and what was reported. A company can report record earnings and still fall if they are below expectations, or if management lowers its guidance for future quarters. Guidance and commentary on margins, orders and costs often matter more than the headline figures.

Interest rates

Higher interest rates raise the return investors can get from safer assets and increase the rate at which future earnings are discounted. Companies whose value depends on profits far in the future, such as fast-growing technology firms, tend to be more sensitive to rate expectations than those generating steady cash today. Central-bank decisions and inflation data can therefore move equity indices sharply; our guides to central banks and interest rates and bonds and yields explain the mechanism.

The economy and sectors

Growth data, purchasing managers' indices and employment reports shift expectations for corporate revenue. Sectors react differently: banks to the yield curve, energy companies to oil prices, exporters to currency moves, retailers to consumer spending.

Company-specific events

Mergers and takeovers, management changes, regulatory decisions, product launches, legal cases, profit warnings and share buybacks can all move a single share far more than the market.

Flows and index changes

When a company joins or leaves a major index, funds that track the index must buy or sell, usually at the closing auction on the effective date. Large flows from funds, options hedging and quarter-end rebalancing can move prices independently of news. Our guide to what is a stock index covers rebalancing.

Risk appetite

In broad sell-offs, shares tend to fall together as investors reduce risk, and correlations between them rise. In calmer periods, prices are driven more by company-specific news.

Common misconceptions

• "The price is set by the company." It is set by the latest trades between investors. The company only receives money when it issues shares.
• "Good results mean the share goes up." What matters is results relative to expectations, and guidance for the future.
• "The quoted price is what I will get." Only up to the size available at that price. Larger orders, thin shares and fast markets can mean worse average prices.
• "Stops protect me overnight." Shares can open well away from the previous close after news released outside hours.
• "A low share price means a cheap company." The share price alone says nothing about value; what matters is the price relative to earnings, assets or cash flow, and the number of shares in issue.

Frequently asked questions

Who sets the price of a share?

Buyers and sellers do, through the order book. The last traded price is where the most recent buyer and seller agreed, and the best bid and offer show where the next trade could happen. Auctions set the opening and closing prices.

What is the difference between an exchange and a broker?

An exchange runs the marketplace and matches orders between its members. A broker is a member firm, or works through one, that takes orders from clients, routes them to venues and holds the resulting shares on the clients' behalf.

What does T+1 settlement mean?

That cash and shares are exchanged one business day after the trade date. The US moved to T+1 in May 2024. The EU, UK and Switzerland currently use T+2 for most share trades and are scheduled to move to T+1 on 11 October 2027.

Why do share prices gap at the open?

News released while the market is closed, such as earnings or overseas market moves, is absorbed in the opening auction. The first price of the day can therefore be far from the previous close, and stop orders are filled at the first available price.

What is a market maker in shares?

A firm that continuously quotes buy and sell prices, earning the spread in exchange for providing liquidity. Some are appointed by exchanges with formal obligations; others simply compete by posting orders.

Can I trade shares outside normal hours?

US brokers often offer pre-market and after-hours trading, with lower liquidity and wider spreads. Most European venues have limited or no retail out-of-hours trading. Share CFDs usually follow the exchange's regular session only.