Companies raise money once
Later trades are between investors.
All tracks and lessons
How stock exchanges work
Companies raise money once; after that, shares change hands between investors on exchanges.
In this lesson you will
- Tell the primary and secondary markets apart
- Explain bid, ask and spread
- Choose between market and limit orders
There are two markets for shares. In the primary market, a company sells new shares to raise money — an initial public offering (IPO) is the best-known example. In the secondary market, investors buy and sell existing shares with each other, and the company receives nothing.
What an exchange does
An exchange matches buyers and sellers under set rules. Prices move as orders change: more buyers than sellers at a price pushes it up; more sellers pushes it down.
Bid, ask and spread
The bid is the highest price a buyer is offering; the ask is the lowest price a seller will accept. The difference is the spread. Busy, widely traded shares usually have small spreads.
Order types
- Market order: buy or sell now at the best available price.
- Limit order: buy or sell only at your price or better; it may not fill.
Brokers
Individuals reach exchanges through a broker. Check a broker’s fees and confirm it is registered; FINRA BrokerCheck lets you look one up. Education only — GetGuac does not recommend individual stocks.
By the GetGuac team · Editorial policy
Three ideas to keep
Price is agreement
Buyers and sellers meeting.
Limits protect price
At the cost of maybe not filling.
Do it in 4 steps
Learn the two markets
Primary and secondary.
Read a quote
Bid, ask, spread.
Understand order types
Market versus limit.
Check any broker
Fees and registration.
Reading a quote
Made-up quote for Example Co.
| Field | Value | Meaning |
|---|---|---|
| Bid | $49.95 | Best buyer price |
| Ask | $50.05 | Best seller price |
| Spread | $0.10 | Ask − bid |
| Market buy of 100 shares | about $5,005 | Fills near the ask |
A limit buy at $49.95 would cost less if filled — but it might not fill.
Where this usually goes wrong
- Using market orders on thinly traded shares
- Ignoring the spread as a cost
- Using an unregistered broker
Look up any widely traded fund’s quote and calculate its spread.
Tools and guides for this lesson
Quick quiz
1. When you buy a share on an exchange from another investor, the company receives…
2. The spread is…
3. A limit order…
0 of 3 answered
Puzzle
Bid $19.90, ask $20.10. You buy 50 shares at the ask and immediately sell at the bid. What did the spread cost you?
Show the answer
$10
Spread $0.20 × 50 shares = $10.