How a stock market works

A stock market is simply a place where people who want to sell shares meet people who want to buy them. Today that place is a computer system run by an exchange, such as the London Stock Exchange or Nasdaq in New York.

The exchange doesn't set prices. It keeps an order book: a live list of everyone offering to sell, and at what price, and everyone wanting to buy, and at what price. When a buyer and a seller agree, a trade happens, and that price becomes the latest share price.

So at any moment there are two prices, not one. The bid is the most anyone is currently willing to pay. The ask (or offer) is the least anyone is willing to sell for. The ask is always a little higher than the bid, and the gap between them is called the spread.

Here's a real example from this morning. Hargreaves Lansdown showed SSE at 2,489p to sell and 2,491p to buy. The spread is 2p, under 0.1% of the price. If you bought and immediately sold, you would lose that 2p a share before the price had moved at all.

Big, busy shares like SSE, Microsoft or the global tracker funds have tight spreads because huge numbers trade every day. Smaller, quieter shares can have spreads of 1% to 5%, which quietly eats into returns.

Who makes sure there is always someone to trade with? Firms called market makers stand ready to buy and sell all day, and the spread is how they get paid.

Markets also keep hours. London trades from 8:00 to 16:30 UK time and New York from 14:30 to 21:00 UK time. Prices can still move outside those hours: Enphase fell about 16% in after-hours trading last night after its results, so a share can open far from where it closed.

For a long-term investor the lesson is simple. The spread is a hidden cost each time you trade, so trading less, and sticking to busy shares and funds, keeps more of your money working.