The stock market or an exchange is a marketplace where you can buy and sell shares. Simply explained, the stock exchange is like a large auction site for shares. It is a so-called secondary market, like Craigslist or Amazon, where you buy shares from other savers.
So, how does the stock market work?
The stock market works in such a way that sellers and buyers agree on a price for which the share is to be sold or bought (the share price). In other words, if you are going to buy shares, there always needs to be someone who wants to sell the same shares, this does not happen automatically as with, for example, fund purchases.
However, you do not have to look for the seller and contact him or her privately, such as on Craigslist, but the stock exchanges and trading platforms act as trade coordinators. They match sellers and buyers with each other and provide a place to do stock trading.
These trading venues are now available on the internet, or online as it is also called, and stock trading has therefore been facilitated in recent times.
What is a stock order?
When you buy or sell shares, you place an order on the market. Normally, the order is valid for one day, this is called an intraday order.
If you have not received a settlement during the trading day (ie you have not managed to buy or sell any shares), the order will be removed from the market.
You therefore need to place a new order the next day if you still want to buy or sell the shares.
It is possible to place orders that are valid longer than during a trading day, a so-called multi-day order.
What is the order depth?
In the depth of the order, you see how buyers and sellers are at the moment. There you can see what the buyers are willing to pay for the share and what the sellers are willing to sell their shares for.
In the order depth, you get an indication of what price you can buy or sell the share at to get a deal.
In other words, the order depth shows both how many shares are on the market among buyers and sellers and at what price.
How do you “fish” in the order depth?
Fishing in the depth of the order means that you go below or above the price at which the share is currently traded. The reason why it is called fishing is because you are fishing for a better price.
In other words, you want to pay a lower price for the share you want to buy – and sell at a higher price than the share’s current price.
The risk of fishing in the depth of the order is that you will not receive a settlement on your order.
What are settlement days and how do they work?
Swedish stock exchanges apply two settlement days. This means that in the case of stock trading, the ownership does not transfer until after two trading days.
This means that if you buy a share, you will be registered in the share register, and thus registered as a shareholder, only after two days.
If you sell a share, it will be the reverse scenario, where you will be written off from the share register and receive the money from the sale after two trading days.
The price at which you have bought or sold your shares cannot be changed in the meantime.
However, some brokers have a service where you get access to a preliminary balance directly on the business day to be able to continue trading in shares.
This means that you do not have to wait for the settlement date to fall and can continue to buy and sell shares.
What is the difference between business day and settlement day?
Business day is the date when the deal is made, ie when buyers and sellers have agreed on the price and the order has been closed.
This means that when buying, the money is deducted from your account provisionally and the shares are booked in, or when selling, the money is provisionally booked into the account and the shares are booked out.
Settlement date is the date when the transaction went into settlement, which means that this is when you receive the money or shares in practice.
What is “best price” trading?
The trade takes place at the best possible price, which means that you always get the best price that the market can offer at the moment.
This means that if you want to buy a share for a certain price and there is already a seller in the order depth who is willing to sell at a lower price, ie more advantageous for the buyer, the closing will automatically take place at the lower price and not the higher price that the buyer stated when he / she placed the order.
John has placed a sell order on Investor A shares for $223 / share that are on the market. Maria then places a purchase order on Investor A for $224 / share.
Maria will then, all other things being equal, be allowed to buy the shares for $223 / share and thus the price will be lower than what Maria was willing to pay from the beginning.
Unregulated stock markets
There are also trading venues that are similar to stock exchanges but where the rules for the listed companies are not as strict as on an actual stock exchange.
These trading venues may therefore not be called stock exchanges, but are instead referred to as Multilateral Trading Facility or MTF.
In these trading venues, you find many upstarts who cannot afford or have the opportunity to be listed on a stock exchange.
Three of the largest MTFs in the Nordic region are First North (owned by Nasdaq), Nordic MTF (owned by Nordic Growth Market) and Spotlight Stock Exchange.
Why is there a stock market?
If a company needs extra capital, there are basically two choices:
- Take a loan
- Sell parts of the company
Taking out a loan is associated with repayments and interest. In addition, it is not certain that you will actually find a lender who is willing to lend the sums you need.
If you instead sell parts of the company, you get new capital in exchange for sharing the company’s future successes.
What the stock exchange contributes is to facilitate trading in these shares. On the stock exchange, private individuals – you and I – get access to stock trading, something that in many cases is otherwise only possible for larger investors.
In order for a company’s shares to be able to be traded via a stock exchange, it is required that it be listed on a stock exchange. The requirements for a company to be approved for listing are strict.
In this way, the stock exchange also acts as a controller. When you buy shares in listed companies, the risk is small that you invest in pure scam companies or companies that do not meet the rules required to be listed.
There are marketplaces where you can trade shares in companies that do not meet the strict requirements required to be listed on the stock exchange.
Buying and selling such shares is usually associated with greater risk than trading with listed companies.