How the stock market works: orders, hours and prices
What happens when you buy a stock: who sells it to you, what types of orders exist, when trading happens and how much it costs.
A stock exchange is an organized market where stocks and other securities are bought and sold. In Mexico there are the Mexican Stock Exchange (BMV) and the Institutional Stock Exchange (BIVA); in the U.S., the largest are the NYSE and the Nasdaq. You don't trade directly on the exchange: you do it through a brokerage or a broker.
Who sells you the stock
When you buy, someone else is selling. The exchange gathers buy and sell orders and matches them. At any moment there's a bid (the highest price someone offers to pay) and an ask (the lowest price someone accepts). The difference is the spread; in heavily traded stocks it's cents, in thinly traded ones it can be large.
Types of orders
| Order | What it does | When it's used |
|---|---|---|
| Market | Buys or sells now, at the best available price | When executing matters more than the exact price |
| Limit | Only buys at that price or lower (or sells at that price or higher) | To control the price; it may not execute |
| Stop (loss) | Triggers if the price touches a level, then sells at market | To limit losses |
| Stop limit | Triggers at a level and places a limit order | To limit losses without selling at any price |
Trading hours
The New York Stock Exchange trades from 9:30 to 16:00 New York time. In Mexico City that's 7:30 to 14:00 when the U.S. is on daylight saving time and 8:30 to 15:00 the rest of the year (Mexico no longer changes its clocks). The BMV adjusts its hours to match New York. Outside those hours there are extended sessions with fewer trades and more volatile prices.
Settlement
When you buy, the stock and the money are formally exchanged a few days later: today in the U.S. and in Mexico settlement is T+1 (one business day after the trade). So, if you sell, the money may take a day to be available to withdraw.
What trading costs
- Commission per trade: a percentage or flat fee per buy or sell (plus VAT in Mexico).
- Spread: the difference between bid and ask, which you pay implicitly.
- Custody or account fees: some institutions charge to hold your securities.
- Exchange rate: if you buy in dollars, the markup when converting your pesos.
These costs seem small, but if you trade very often they add up. Someone who buys and sells every week can pay more in fees than they earn.
Volatility, halts and circuit breakers
If a stock moves too much in a short time, the exchange can halt its trading for a few minutes. And if the whole market falls a lot in a day (for example 7% in the S&P 500), circuit breakers kick in, stopping trading across the market to give people time to calm down.
Test what you learned
1. Which order ensures you don't pay more than a price you choose?
- Market
- Limit
- Stop
Show the answer
Limit. A limit order only executes at your price or better.
2. What is the spread?
- The broker's commission
- The difference between the bid and the ask
- The stock's dividend
Show the answer
The difference between the bid and the ask. It's an implicit cost; it's smaller in heavily traded stocks.
3. What does T+1 settlement mean?
- The trade is finalized one business day later
- You can only buy one stock per day
- You pay a 1% commission
Show the answer
The trade is finalized one business day later. The exchange of money and securities completes on the next business day.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.