Week 2: How a Stock Trade Actually Happens

Walks through what actually happens between placing a stock order and owning the shares: the exchange that matches it, the broker that routes it, the difference between a cash and a margin account, and why a market order and a limit order can fill at different prices in the same second. This is the course’s first source of execution friction — a small, recurring cost a small account pays before any strategy has a chance to work.

The question this week answers#

Between clicking “buy” and actually owning a share, several separate systems do separate jobs — what are they, and why is the price you see when you click not necessarily the price you pay?

By the end of this lecture#

• name the separate roles an exchange and a broker each play in a trade
• distinguish a cash account from a margin account
• explain why a market order and a limit order can fill at different prices
• trace a simulated order from click to fill

Key ideas#

A broker is who a trader deals with directly — it takes the order and routes it onward. An exchange (or another matching venue a broker routes to) is where the order actually meets other orders and gets matched. These are different jobs even when a single app makes them feel like one step.

A cash account can only spend money already in it. A margin account can borrow against the value of what’s already held, which is what makes short selling and stock-level leverage possible — mechanics Week 8 covers in full; for now, the distinction to hold onto is just that margin means borrowed money is now part of the position.

Every order is quoted against two prices at once: the bid (the highest price a buyer is currently offering) and the ask (the lowest price a seller is currently accepting). A market order fills immediately at whatever the best available bid or ask is — price is not guaranteed. A limit order fills only at a chosen price or better — price is guaranteed, but the order might never fill at all.

A worked example#

A simulated stock “ABC” is quoted with a bid of $50.00 and an ask of $50.05. A student places a market buy order for 10 shares. Because a market buy fills against the ask (the price sellers are willing to accept right now), the order fills at $50.05 a share, not the $50.00 bid and not some average of the two.

The numbers#

10 shares at the $50.05 ask:

10 × $50.05 = $500.50

Compare that to the mid-price — the midpoint between bid and ask, often mistaken for “the” price of a stock:

(50.00 + 50.05) ÷ 2 = $50.025

10 × $50.025 = $500.25

The market order cost $0.25 more than the mid-price suggested it would. That $0.25 is the cost of certainty — accepting whatever price was available rather than waiting for a specific one. It looks trivial on 10 shares; it stops looking trivial once Week 7 covers trading the same spread dozens of times a day.

What a diagram would show#

A simplified market diagram: a single row showing a ladder of buy orders stacked below a ladder of sell orders, with the bid and ask labelled at the point where they nearly meet, and an arrow showing a market order “reaching across” the gap to hit the ask.

Try it yourself#

The takeaway#

The quoted price you see is an observation about where the market currently is, not a promise about what you’ll pay — the gap between the two is execution friction, and it’s the first of several this course tracks. A market order trades certainty of execution for uncertainty of price; a limit order trades the reverse. Neither is a signal about whether the stock is a good idea — that’s a different question, and Weeks 3–4 start building the vocabulary for it.