Foundations
How Stock Markets Work: A Beginner’s Guide
Exchanges, brokers, order books and price formation — the essential mechanics every new trader should understand.
6 min read · Kanira
What an exchange actually does
A stock exchange is a regulated marketplace that matches buy orders with sell orders. In India, the National Stock Exchange (NSE) and BSE are the main equity exchanges; in the US, the NYSE and Nasdaq play the same role.
When you place an order through a broker, it travels to the exchange’s order book — a live list of all outstanding buy (bid) and sell (ask) orders at different prices.
How prices are formed
A trade happens when a buyer and seller agree on a price. The last traded price is what you see on your screen. If buyers are more aggressive than sellers, they accept higher prices and the price rises — and vice versa.
This is why price is often described as the final record of every participant’s decision. Understanding that record is the foundation of price action trading.
Key terms to know
Before placing any trade, make sure you can explain each of these in your own words:
- Bid and ask — the best prices buyers and sellers are currently willing to trade at
- Spread — the difference between bid and ask
- Liquidity — how easily you can buy or sell without moving the price
- Market order vs limit order — speed versus price control
- Settlement — when ownership and money actually change hands