How Stock Markets Work: A Practical Overview
Understanding the mechanics of stock markets helps you trade with confidence and avoid common structural mistakes.
Basics · May 19, 2026 · 5 min read
Stock markets connect buyers and sellers of company shares. When you buy a stock, you're purchasing partial ownership of a company. Stock exchanges like the NYSE or NASDAQ act as the venue — providing the infrastructure, rules, and price discovery mechanism that makes this possible.
How Prices Are Determined
Stock prices are determined in real time by supply and demand. If more people want to buy a stock than sell it, the price rises until it reaches a level where sellers are willing to part with shares. Large institutional orders, earnings announcements, macro data, and sentiment shifts all alter this supply-demand balance. No single entity controls where a stock price goes — it is the aggregate of millions of orders.
Market Makers and Liquidity
Market makers are firms (often large banks or specialist firms) that stand ready to buy and sell stocks at quoted prices, providing liquidity to the market. They profit from the bid-ask spread. In electronic markets, many market-making functions are now performed by high-frequency trading algorithms. Understanding that there is always a counterparty to your trade — and that counterparty may be sophisticated — is an important mental shift for retail traders.
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