Trading is the act of buying or selling an asset in a market. A trade occurs when a compatible buyer and seller agree on terms and their orders are matched.

Clicking a button is only the beginning. Brokers, exchanges, alternative trading systems, clearing agencies and custodians may all play a role between an investor’s decision and settlement.

Why markets exist

Markets give buyers and sellers an organized way to find one another. Companies can raise capital by issuing securities, while investors can later transfer many securities in secondary markets. The SEC’s mission includes protecting investors and maintaining fair, orderly and efficient markets.

From an order to an execution

  1. The customer enters an order. It identifies the security, quantity and instructions.
  2. The broker receives the order. The broker checks the account and routes it.
  3. A venue or dealer handles it. The order may reach an exchange, alternative trading system or market maker.
  4. A compatible order is found. An execution occurs under the order’s instructions.
  5. The trade is cleared and settled. Records, ownership and payment are reconciled.

Execution is the agreement to trade. Settlement is the later completion of the exchange.

Bid, ask and price discovery

The bid is a displayed buying price. The ask is a displayed selling price. Their difference is the spread. Prices change as orders, liquidity and information change. The last price does not guarantee the next execution price.

“Online trading is quick and easy, but online investing takes time.” — Investor.gov

Market orders and limit orders

A market order generally prioritizes execution over a specific price. A limit order sets the maximum buying price or minimum selling price, but may never execute. Each involves a trade-off between execution certainty and price control.

Costs and risks

Zero commissions do not make trading cost-free. Costs can include spreads, price movement, contract or regulatory fees, margin interest, taxes and market impact. Risks include loss, unexpected execution prices, limited liquidity, duplicated orders, leverage and misunderstood product structures.

A beginner’s checklist

  1. What exactly is the asset or contract?
  2. What rights or obligations does it create?
  3. What does the order type prioritize?
  4. What are the explicit and hidden costs?
  5. How much could be lost?
  6. How will execution and settlement be confirmed without duplicating the order?

The Konaloo Bull and Bear can disagree about the future and still meet at one price.

Verified sources

Educational content only. This is not personalized investment advice, a recommendation, prediction or trade signal. Trading and investing involve risk of loss. News is not a trading signal.