What a stock exchange is
A stock exchange is a regulated marketplace that matches buy and sell offers. You don't buy from the company, you buy from another investor who happens to be selling right now.
Most people picture the exchange as a place where companies sell shares. That's only true the very first time, at the IPO. After that, investors trade among themselves.
When you buy a share, the company doesn't get a cent from it. Your money goes to whoever held the share before you. The exchange just makes sure you find each other and that the trade happens in an orderly way.
The price forms from the highest amount buyers are willing to pay and the lowest amount sellers are willing to accept. When those two numbers meet, a trade happens. The last such trade is the price you see.
So the price isn't a judgment on the company, it's the outcome of the most recent agreement between two people, or two computer programs. Over the long run it tracks the company's condition. Over the short run, often not at all.
A distinction is made between the primary and secondary market. On the primary market, capital flows to the issuer, for instance at an IPO or a capital increase. On the secondary market, existing securities change owners without any money reaching the company. The economic purpose of the secondary market is liquidity: it's precisely because securities can be sold at any time that the primary market is attractive in the first place.
Price discovery in continuous trading happens through an order book, where buy and sell orders are sorted by price and time. The best buy price is called the bid, the best sell price the ask, and the gap between them the spread. A trade occurs when an incoming order matches an existing counter-order. The last traded price is what's shown as the price, which means a quoted price is always a historical record of a single transaction, not a price at which any quantity could be traded.
Alongside regulated exchanges, off-exchange venues and systems exist where brokers execute client orders internally. This creates a conflict of interest when the execution venue pays the broker for the order flow. The relevant metric for an investor is therefore not the stated order fee alone, but actual execution quality including the spread.
Summary
- When you buy a stock, you're paying another investor, not the company.
- The quoted price is the last completed trade, not a valuation.
- The spread is a fee that isn't labeled as a fee.
Did you get it?
Does a company get money when you buy its stock?
Only at the IPO or a capital increase. In normal trading, your money goes to the previous owner.
What exactly does the displayed price tell you?
The price at which the most recent trade happened. It doesn't mean any quantity could be traded at that price.
Why isn't comparing order fees enough?
Because the spread and execution quality create additional costs that aren't itemized.
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