Every time you tap "buy" on an investing app, something remarkable happens in milliseconds. An order flies from your phone to a broker, onto an exchange, gets matched with a seller, executes at a price, and your account updates. You've bought a fraction of a company. Most people never wonder how that actually works. You should — because understanding it makes you a better investor.
Every stock traded on an exchange has an order book — a live, constantly updated list of all the buy orders and sell orders currently waiting to be matched. Buy orders are listed at the highest price a buyer is willing to pay (the bid). Sell orders at the lowest price a seller will accept (the ask).
The difference between the bid and ask is called the spread. For a liquid stock like Apple or Vodafone, the spread might be a fraction of a penny. For a small company with few buyers and sellers, it could be several percent — which is an immediate cost you pay just to enter and exit the position.
If you buy at market price, you pay the ask. If you sell, you get the bid. The spread is an invisible cost on every trade.
A market order says "buy this stock right now at whatever the current price is." It executes immediately but you have no control over the exact price — during volatile markets, you might get a worse price than expected. This is called slippage.
A limit order says "buy this stock, but only if the price is £X or lower." It gives you price control but no guarantee of execution — if the stock never drops to your limit, the order just sits there unfilled.
For most people buying liquid ETFs or large-cap shares, a market order is fine. For anything less liquid — smaller companies, fast-moving moments — a limit order protects you from nasty surprises.
For every buyer there needs to be a seller, and they don't always show up at the same moment. Market makers solve this. They're firms that commit to always being ready to buy or sell a stock — quoting both a bid and an ask simultaneously. They make money on the spread. Their role is crucial: without them, you might want to buy a stock and find no one willing to sell at a reasonable price. Liquidity would collapse.
During market panics, market makers can widen their spreads dramatically or pull back — one reason prices move more violently in crashes than fundamentals alone would justify.
In the US, stocks can be traded before the official open (4–9:30am ET) and after close (4–8pm ET). Earnings reports usually drop after market close — companies don't want to disrupt live trading. The big gap you see when a company reports earnings overnight is set in after-hours trading before the next morning's open.
Practical takeaway: use market orders for liquid ETFs and large caps. Use limit orders for anything smaller or less liquid. Avoid trading in the first and last 15 minutes of the session when spreads widen. Transaction costs compound against you over time — minimise them by trading only when your strategy requires it.
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