how buy and sell stocks works guide

How Buying and Selling Stocks Works

how buy and sell stocks works is a practical question for any investor or trader. This article explains what stocks are, who participates in markets, how you place and execute orders, and what happens after a trade. You will learn the lifecycle of a trade from order placement through clearing and settlement, common order types and time-in-force options, sources of costs, margin and short selling mechanics, and practical steps to place a trade using modern broker and exchange services (including Bitget recommendations where relevant).

As a quick guide: this article covers account setup, order selection, order routing and execution, trade confirmation and settlement, fees and taxes, and risk-management best practices so you can act with clarity and confidence.

Basics of Stocks and Stock Markets

Stocks represent ownership in a company. Holders of common stock usually have voting rights and the potential to receive dividends; preferred stock typically offers priority on payments but limited or no voting rights. The primary market is where companies issue new shares (IPOs, follow-ons); the secondary market is where existing shares trade among investors.

Exchanges such as national regulated markets provide centralized marketplaces that list securities, publish prices, and enforce trading rules. Electronic trading venues and broker networks route orders into these venues. Understanding how buy and sell stocks works begins with recognizing the difference between owning a piece of a company and using a market venue to exchange that ownership for cash.

Market Participants and Intermediaries

A functioning stock market relies on multiple participants:

• Retail investors: individuals trading for personal accounts.
• Institutional investors: asset managers, pension funds, hedge funds, and other large pools of capital.
• Brokers and broker-dealers: firms that accept orders from clients and route them to execution venues; they may provide custody, margin lending, and research.
• Market makers: liquidity providers that post continuous buy (bid) and sell (ask) prices to narrow spreads and facilitate quick execution.
• Exchanges and alternative trading systems (ATS): venues where orders match; some ATS (including dark pools) match large orders away from public quotes.
• Clearinghouses and central counterparties: entities that interpose between buyer and seller to guarantee the trade and manage counterparty risk.

Knowing these roles helps explain how buy and sell stocks works in practice: orders travel from your account through a broker, reach an execution venue, and are then cleared and settled by the centralized infrastructure.

Opening an Account and Types of Brokerage Services

To trade, you start with an account at a brokerage. Account types affect taxes, available instruments, and trading rules:

• Cash account: you use settled cash to buy securities. You cannot use unsettled proceeds to purchase other securities.
• Margin account: the broker lends buying power against posted collateral so you can use leverage; margin involves interest costs and margin requirements.
• Retirement/registered accounts: accounts with tax advantages or constraints (e.g., IRAs, 401(k)-style accounts in some jurisdictions).
• Custodial accounts: accounts managed on behalf of minors or other beneficiaries.

Brokerage models vary:

• Full-service brokers: provide research, advice, and a wide range of services, typically with higher fees.
• Discount/online brokers: focus on low-cost execution, digital platforms, and tools for self-directed investors.

KYC (Know Your Customer), identity verification, and suitability checks are standard when opening an account. Brokers also offer custodial recordkeeping and electronic statements so you can track positions and trades.

Bitget offers retail-friendly trading services and custody options, including support for both cash and margin trading where regulated. For crypto-native users looking to bridge cash markets and digital assets, Bitget Wallet and Bitget’s trading interface aim to simplify asset custody and execution.

Order Types and Instructions

Understanding order types is central to how buy and sell stocks works. Common orders include:

• Market order: instructs the broker to buy or sell immediately at the best available price; guarantees execution but not price.
• Limit order: sets a maximum buy price or minimum sell price; execution occurs only at the limit price or better.
• Stop order (stop-loss): becomes a market order when a specified price (the stop) is reached.
• Stop-limit order: becomes a limit order when the stop price is reached; may not execute if market moves past the limit.
• Market-on-close (MOC) / Limit-on-close (LOC): execute at or near the market close according to instructions.
• Buy-stop / Sell-stop: commonly used to enter positions above/below current prices or to limit losses.

Advanced order features:

• All-or-none (AON): requires the entire order fill or none.
• Fill-or-kill (FOK): requires immediate full execution or cancellation.
• Pegged orders: price pegged to a reference (e.g., midpoint or best bid/ask).

Choosing the right order type affects your execution price and probability of a fill. For example, using a limit order controls price but may leave you unfilled in fast markets; market orders increase fill likelihood but can suffer slippage.

Time-in-Force and Duration

Time-in-force settings determine how long an order remains active:

• Day: the order expires at the end of the trading day if not filled.
• Good-til-cancelled (GTC): remains active until filled or cancelled (subject to broker limits and regulatory rules).
• Immediate-or-cancel (IOC): executes any portion immediately and cancels the remainder.
• Good-til-date: active until a specified date.

Time-in-force choices affect exposure to overnight moves and liquidity changes and are important when you learn how buy and sell stocks works for multi-day strategies.

Order Routing and Execution

When you submit an order, your broker routes it to an execution venue. Routing decisions consider venue fees/rebates, available liquidity, potential for price improvement, and regulatory best-execution obligations. Execution venues include public exchanges, market makers, and ATS.

Brokers have a duty of best execution — they must seek the most favorable terms reasonably available under prevailing market conditions. Best execution factors include price, speed, likelihood of execution, order size, and the costs of routing.

Order routing can influence fills. Some brokers may route orders to internal desks or external market makers that offer price improvement or execution guarantees. Understanding your broker’s routing practices and disclosures helps you assess how buy and sell stocks works from submission to trade fill.

Market Makers, Liquidity, and Price Improvement

Market makers post continuous bid and ask prices, provide liquidity, and narrow bid-ask spreads. The spread is an implicit cost for trading: buying at the ask and selling at the bid creates a friction that affects realized returns.

Price improvement occurs when an order executes at a better price than the quoted national best bid or offer (NBBO). Price improvement can result from internalization, aggressive quoting by market makers, or smart order routing.

Payment for Order Flow and Controversies

Some brokers accept payment for order flow (PFOF) from market makers who pay for the right to execute client orders. PFOF can fund zero-commission models and sometimes deliver price improvement, but it creates potential conflicts of interest because brokers may prefer venues that pay them rather than venues that produce the best net price for clients.

Regulators require disclosure of PFOF arrangements, and some jurisdictions scrutinize or limit PFOF to protect investors. When you evaluate how buy and sell stocks works with a broker, check disclosures on order routing and whether PFOF influences routing decisions.

Trade Confirmation, Clearing, and Settlement

Once an order is executed, you receive a trade confirmation showing execution price, quantity, and fees. Post-trade steps include clearing and settlement:

• Clearing: the clearinghouse nets positions across market participants and assigns obligations. Clearing reduces counterparty risk by centralizing trade obligations.
• Settlement: the exchange of cash for securities. Settlement finality means the buyer receives legal title to the securities and the seller receives cash.

Settlement timelines vary by jurisdiction. As of 2024-05-28, according to the U.S. Securities and Exchange Commission (SEC), U.S. equities moved to a T+1 settlement cycle, meaning most trades settle one business day after the trade date. Different markets may use T+2 or other standards. Check your local regulator and broker for precise settlement rules.

Settlement affects cash availability and the timing of subsequent trades. For example, selling a stock settles according to the market’s settlement cycle; proceeds may only be used for some purposes after settlement completes.

Fees, Costs, and Taxes

Costs of trading include explicit fees and implicit costs:

• Explicit costs: commissions, exchange fees, regulatory fees, and platform or data fees. Many brokers now offer zero commission for online equity trades, but other fees may apply.
• Implicit costs: bid-ask spread, market impact (price movement caused by your order), and slippage (difference between expected and executed price).
• Borrow and margin costs: interest on borrowed funds for margin or costs of borrowing shares to short sell.

Taxes depend on jurisdiction. Common tax considerations include:

• Capital gains tax on profits when you sell shares; rates often differ for short-term vs long-term holdings.
• Dividend withholding tax or ordinary income taxation on dividends, depending on account type and local rules.
• Tax-advantaged accounts may defer or exempt taxes but impose other rules on withdrawals and contributions.

Always consult local tax authorities or a qualified tax advisor to understand specific tax obligations related to trading. This guide explains how buy and sell stocks works from an operational perspective, not as tax advice.

Margin Trading, Short Selling, and Leverage

Margin accounts let you borrow against your portfolio to increase buying power. Key points:

• Initial margin: the minimum equity required to open a leveraged position.
• Maintenance margin: the minimum equity required to keep a leveraged position open; falling below this can trigger margin calls.
• Margin call: the broker’s demand to add funds or liquidate positions to restore required equity.

Short selling lets you profit from a decline in a stock’s price by borrowing shares and selling them, then buying back later to return to the lender. Mechanics and risks:

• Locate requirement: broker must locate a borrowable share before executing a short sale in many jurisdictions.
• Unlimited downside risk: losses can exceed initial collateral if a stock price rises significantly.
• Recall risk: lenders can recall borrowed shares, forcing short sellers to close positions.

Leverage magnifies both gains and losses; margin interest and requirement changes can quickly make leveraged strategies costly. When exploring how buy and sell stocks works with margin and shorts, factor in the added operational and risk management steps required.

Special Instruments and Variations

Beyond whole shares, markets offer variations that change execution mechanics:

• Fractional shares: allow buying partial shares, making ownership accessible at lower cash amounts. Fractional trades may be internally handled by brokers and are useful for diversification with limited capital.
• ETFs and mutual funds: pooled investments that trade differently. ETFs trade intraday like stocks; mutual funds usually transact at end-of-day net asset value (NAV).
• Options and derivatives: give rights or obligations related to stock prices but require different margin and settlement rules.
• Corporate actions: dividends, stock splits, mergers, tender offers, and spin-offs affect holdings and may require elections or create record dates.

Understanding how buy and sell stocks works across these instruments helps investors choose the right vehicle for exposure and execution needs.

Strategies and Trading Styles

Trading styles influence order choices and execution expectations:

• Buy-and-hold: long-term investing based on fundamentals and diversification.
• Value investing: selecting undervalued stocks for long-term gains.
• Growth investing: focusing on companies with above-average revenue or earnings growth.
• Day trading: intraday trading that opens and closes positions within the same session.
• Swing trading: holding positions for days to weeks to capture medium-term moves.
• Position trading: holding for weeks to months with trend-based strategies.

Each style has different execution and cost sensitivities. Active traders must pay closer attention to spreads, execution speed, and fees; long-term investors emphasize fundamentals and tax efficiency.

Risk Management and Best Practices

Effective risk management is essential to understand how buy and sell stocks works safely:

• Position sizing: limit any single position to a small percentage of your portfolio.
• Diversification: reduce idiosyncratic risk by owning multiple uncorrelated assets.
• Use of stop orders: to limit downside, but recognize stop orders can be triggered by short-term volatility.
• Check order confirmations: always verify fills and execution details after a trade.
• Understand liquidity: thinly traded stocks can have wide spreads and unpredictable fills.
• Be mindful of market hours: pre-market and after-hours trading have lower liquidity and higher volatility.

Platform and broker reliability matter. For traders who also interact with digital assets, Bitget Wallet provides integrated custody options; Bitget’s trading products aim to combine transparent pricing with execution tools to support risk management.

Regulation, Investor Protections, and How to Vet a Broker

Regulation protects investors and promotes market integrity. In the United States, primary regulators include the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Regulators set rules on disclosure, best execution, order handling, and market transparency.

Investor protections and vetting steps:

• Check broker registration and disciplinary history with regulators or tools like BrokerCheck in the U.S.
• Confirm whether client assets are held in segregated custodial accounts and whether a deposit-protection scheme (e.g., SIPC for member firms in the U.S.) applies.
• Review fee schedules, margin and lending terms, and order routing disclosures.
• Read policy documents on how the broker handles conflicts of interest and payment for order flow.

Regulatory rules and protections differ by jurisdiction. If you trade internationally or use cross-border services, verify local rules and protections before selecting a broker. Bitget publishes clear user disclosures and compliance information — review those materials to understand protections for your account.

Common Pitfalls and Scams

Frequent mistakes when learning how buy and sell stocks works include:

• Overtrading: excessive turnover increases costs and reduces returns.
• Ignoring fees and taxes: small fees and tax burdens compound across frequent trades.
• Excessive leverage: amplifies losses and the risk of margin calls.
• Failing to verify order fills or account balances promptly.

Warning signs of fraud or platform malpractice:

• Unclear fee or order routing disclosures.
• Promises of guaranteed returns or insider tips.
• Difficulty withdrawing funds or unexplained account freezes.

Always use regulated brokers, verify identity and compliance documents, and contact your regulator if you suspect wrongdoing.

Practical Step-by-Step: Placing a Trade (Example Workflow)

This step-by-step walkthrough shows how buy and sell stocks works in a typical retail workflow:

1. Research: analyze fundamentals, price history, and news relevant to a company.
2. Choose an account: decide between cash, margin, or tax-advantaged account.
3. Identify the ticker symbol: confirm the exact listing and share class.
4. Select order type and quantity: e.g., place a limit buy for 50 shares at $X.
5. Set time-in-force: day, GTC, or IOC depending on your intent.
6. Preview and submit: confirm order details and estimated costs.
7. Receive confirmation: check execution price, quantity, and fees.
8. Monitor position: watch price, news, and corporate events.
9. Close or adjust: place exit orders or adjust stops as market conditions evolve.
10. Settlement and recordkeeping: track settlement dates and tax records.

When using Bitget’s platform for equities or multi-asset trading, the interface typically guides you through these steps and provides execution confirmations and account statements for recordkeeping.

Technology and Market Structure Trends

Electronic trading, algorithmic execution, and mobile apps have reshaped how buy and sell stocks works. Key trends include:

• Faster settlement cycles (e.g., T+1 in the U.S.) to reduce counterparty risk and free up capital faster. As of 2024-05-28, according to the SEC, U.S. equities transitioned to T+1 settlement.
• Proliferation of algorithmic and smart order routing to optimize price and execution quality.
• Growth of alternative venues (ATS and dark pools) for large-block trades.
• Increased retail participation through mobile apps with simplified interfaces.

As of 2025-12-31, market structure developments continue to emphasize speed, transparency, and venue competition. Regulators and industry participants monitor developments such as payment for order flow, market fragmentation, and execution quality metrics.

Glossary of Key Terms

• Bid / Ask: the bid is the highest price buyers will pay; the ask is the lowest price sellers will accept.
• Spread: the difference between ask and bid; an implicit trading cost.
• Liquidity: how easily an asset can be bought or sold without affecting its price.
• Slippage: the difference between expected fill price and actual execution price.
• Market Maker: a firm that provides buy and sell quotes to support liquidity.
• Clearinghouse: an intermediary that guarantees trades and manages settlement obligations.
• Settlement: the exchange of securities and cash; e.g., T+1 means settlement occurs one business day after the trade date.
• Limit Order: an order to buy/sell at a specified price or better.
• Market Order: an order to buy/sell immediately at available prices.

References and Further Reading

Use authoritative sources for deeper study on how buy and sell stocks works including regulator guidance and broker education pages. Primary guidance includes regulator investor education and exchange explanations. For investor protections and broker vetting, consult official regulator publications and broker disclosure documents.

As of 2024-05-28, according to the U.S. Securities and Exchange Commission (SEC), settlement practices were updated for U.S. equities to shorten settlement windows. For order-type education and investor protections, see guidance from national regulators and industry bodies such as FINRA and major exchanges.

See Also

• Stock exchange basics
• Mutual funds and ETFs
• Options trading overview
• Investment taxation fundamentals

Notes on Scope and Jurisdiction

Mechanics, settlement timelines, fee structures, and regulatory protections vary by country and market. This article describes common global practices and examples; always consult local regulatory guidance and your broker’s disclosures for rules applicable to your jurisdiction.

Practical Reminders and Next Steps

Understanding how buy and sell stocks works requires combining knowledge of order mechanics with awareness of fees, settlement, and risk management. Start with a small, well-documented trade to learn your broker’s interface and order execution patterns. If you use digital asset services in parallel, consider Bitget Wallet for custody and Bitget exchange services for integrated trading and product access. For more detailed educational modules, review your broker’s learning center and regulator materials.

Further explore Bitget’s platform features, order simulators, and educational tools to practice order types and check historical execution reports. Always verify broker disclosures on order routing, fees, and margin terms before trading live.

As you proceed, remember: this guide explains operational mechanics and risk considerations; it does not constitute investment advice. Verify specifics with your broker, tax advisor, or regulator.

Reporting Notes

• As of 2024-05-28, according to the U.S. Securities and Exchange Commission (SEC), major U.S. equity markets moved to a T+1 settlement cycle to shorten trade finality timelines.
• As of 2025-12-31, market structure commentators and regulators continued to monitor payment for order flow practices and execution quality metrics across execution venues.

These dated references provide context on evolving settlement and market structure practices relevant to how buy and sell stocks works.