From placing an order to execution, settlement, and price formation in stock markets

When people think about stock exchanges, they often imagine a building full of traders yelling into phones. Modern exchanges are mostly electronic, and what matters is not the image but the process. A stock exchange is the structured mechanism that enables buyers and sellers to trade shares under transparent rules, with published prices and standardized execution.

This article explains how stock exchanges work step by step. The goal is to show what actually happens when you place a trade: how your order moves, how it gets matched, what “execution” really means, and what happens after the trade. This is strictly equities-focused and designed as a foundation for new investors who want clarity rather than jargon.

Step 1: a company lists its shares on an exchange

Before a stock can trade on an exchange, it must be listed. Listing means the company meets the exchange’s requirements and agrees to ongoing disclosure and reporting standards. This is one of the reasons exchanges matter: they are not just trading venues, they are also gatekeepers for what can be traded under their rules.

Once listed, the company’s shares become available for trading by market participants through brokers and authorized intermediaries.

Step 2: investors access the exchange through a broker

Most investors do not trade directly on an exchange. They trade through a broker, which provides the account, custody arrangement, order entry tools, and routing infrastructure. In practical terms, the broker is the bridge between you and the exchange ecosystem.

When you click “buy” or “sell,” you are not sending a message to the company. You are sending an instruction into the market through your broker.

Step 3: you place an order (and the order type matters)

An order is your instruction to buy or sell shares under specific conditions. The simplest and most important decision is whether you want speed or price control.

Market orders

A market order is designed to execute as quickly as possible at the best available price. It is useful when liquidity is high and you prioritize execution. The tradeoff is that you accept uncertainty about the exact price you will receive.

Limit orders

A limit order executes only at a specified price or better. This gives you more control and can reduce execution surprises, especially in fast-moving markets. The tradeoff is that the order may not execute if the market never reaches your price.

Step 4: your broker routes the order to a trading venue

Once you submit an order, your broker routes it into the market. Depending on the market structure, the order may go to the primary exchange, to an alternative trading venue, or to a system designed to seek the best available execution. The technical routing details vary, but the practical point is consistent: your order enters a network where it can be matched with the other side.

For investors, the key is not memorizing routing mechanics. The key is understanding that execution quality depends on liquidity, spreads, and the order type you used.

Step 5: the order enters the order book

Most exchange trading is organized around an order book. The order book is a live list of buy orders (bids) and sell orders (asks) at different prices. The highest bid and the lowest ask form the best quoted prices available at that moment.

If your order can match against an existing opposing order in the book, it can execute immediately. If not, it may remain in the order book waiting for a match.

Step 6: matching happens (price-time priority)

Exchanges follow matching rules that determine which orders execute first. A common rule is price-time priority: better prices execute before worse prices, and if prices are equal, earlier orders execute before later ones.

This is one reason why “liquidity” is not an abstract concept. In a liquid stock, there are many orders at many prices, so matching is efficient. In a thin stock, fewer orders can mean wider spreads and more unstable execution.

Step 7: execution occurs (the trade is printed)

Execution is the moment your order is matched and a trade happens. At that point, the market has produced a price for that transaction, and the trade is recorded and reported. This is what investors usually see as a completed fill in their trading platform.

Execution is not the end of the process. It is the end of the pricing step, but the post-trade steps still matter.

Step 8: clearing begins (who owes what to whom)

After execution, clearing is the process of confirming the details of the trade and calculating obligations. In simple terms, clearing answers: who must deliver shares, who must deliver cash, and under what timeline.

Clearing is designed to reduce risk. It helps ensure that if one party fails, the system has mechanisms to handle the problem without breaking the entire market.

Step 9: settlement completes the trade (delivery of shares and cash)

Settlement is the final transfer of shares to the buyer and cash to the seller. It is the step that turns a completed execution into completed ownership transfer in the records of custodians and settlement systems.

For long-term investors, settlement is mostly invisible because brokers manage it behind the scenes. But it matters because it is part of market integrity and it explains why certain actions (like selling immediately after buying) can be subject to settlement rules depending on jurisdiction and broker setup.

Step 10: price formation continues with every new trade

Every executed trade becomes part of price discovery. Prices are not determined by a single “true value” machine. They emerge from the continuous interaction of buyers and sellers. Over time, the market price reflects collective expectations about the company’s future earnings and risk, even though it can be volatile in the short run.

This is why exchanges are central to capital markets: they provide the mechanism through which information, expectations, and liquidity translate into a visible price.

Common misconceptions about exchanges

Many beginners assume the exchange sets the price or that trading directly funds the company. In reality, the exchange provides the rules and infrastructure, but prices come from market participants, and most trading occurs in the secondary market where investors trade with each other.

Another misconception is that execution is always “fair” just because a market is regulated. Regulation helps, but execution still depends on the stock’s liquidity, your order type, and the timing of your trade. Understanding the process is what helps you protect yourself from avoidable execution mistakes.

Conclusion

Stock exchanges work through a structured chain: listing, access through brokers, order placement, routing, order books, matching, execution, and then the post-trade processes of clearing and settlement. Once you understand that chain, the market becomes less mysterious and your decisions become more deliberate.

You do not need to become an expert in market microstructure to invest in equities. But you do need a correct mental model of what happens when you trade. That foundation improves execution discipline, reduces costly beginner mistakes, and prepares you for more advanced equity analysis later.

Frequently Asked Questions

Do I buy stocks from the exchange or from another investor?

In most cases, you buy stocks from another market participant in the secondary market. The exchange provides the venue and rules, but the other side of your trade is typically another investor or institution.

What is an order book?

An order book is the live list of buy and sell orders at different prices. It shows the bids and asks available and is the mechanism used by exchanges to match trades.

What is the difference between execution and settlement?

Execution is when your order is matched and the trade happens. Settlement is when shares and cash are actually exchanged and ownership records are updated through the settlement process.

Why do limit orders sometimes not execute?

A limit order executes only at your specified price or better. If the market never trades at that price while your order is active, it may remain unfilled.

Does higher trading volume make execution easier?

Often, yes. Higher volume tends to correlate with better liquidity, tighter spreads, and smoother execution. Low volume can increase spreads and lead to less predictable fills.