How stocks trade
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
16 min read · updated November 3, 2026
An equities desk spends its day doing three things for clients: getting their orders filled at a good price, giving them exposure to stocks in whatever wrapper suits them, and helping them understand the risk they hold. Each one rests on plumbing most students have never looked at. Where does an order go when you press buy? Why would a hedge fund own a stock through a swap instead of buying it? How do you tell a good manager from a lucky one?
Interviewers for equity sales, cash trading and delta one ask these because they are the job. A candidate who can explain why a 600 share order paid more than the screen price, or why a 15 percent borrow fee kills a short idea, sounds like someone who has watched a market work. This lesson covers the market itself, the synthetic ways to own or short a stock, and the handful of numbers a desk uses to measure a portfolio.
The price on the screen is only good for the size shown there. Everything about how stocks trade, from order types to dark pools to algorithms, is about getting size done without moving that price against you. And when a desk measures a portfolio, return on its own says nothing: the question is return per unit of risk, and how much of that risk is just the market.
The order book
Every exchange keeps an order book for each stock: a live list of everyone willing to trade at a stated price. Buy orders are bids, sell orders are offers (also called asks). Each one is a limit order: a price and a size that sit and wait until someone takes them.
Orders are ranked by price, then by time. The highest bid and the lowest offer sit at the top of the book, and the gap between them is the bid-ask spread. At the same price, whoever arrived first fills first, which is one reason market makers spend so much on speed.
Say a stock's book looks like this:
| Bids (buyers) | Price | Offers (sellers) |
|---|---|---|
| $50.05 | 400 shares | |
| $50.03 | 800 shares | |
| $50.02 | 300 shares | |
| 500 shares | $50.00 | |
| 1,000 shares | $49.99 |
The best bid is $50.00 and the best offer is $50.02, so the spread is two cents.
A market order takes whatever is resting on the other side. Send a market order to buy 600 shares and you get all 300 at $50.02, then 300 of the 800 at $50.03. Your average price is $50.025, half a cent above the quote you saw, and the best offer is now $50.03, so the spread has widened to three cents. Send 1,500 shares instead and you clear the first two levels and take 400 at $50.05, for an average of about $50.033. That climb through the book is market impact.
A limit order flips the trade-off. Buy 600 with a limit of $50.02 and you pay no more than $50.02, but only 300 shares fill at once; the other 300 rest in the book as the new best bid and wait. A limit order priced at or through the other side, a marketable limit, fills like a market order up to its price and stops there.
This is what traders mean by liquidity: how much you can trade quickly near the current price without moving it. A tight spread with tiny size behind it can look liquid and not be. A trader looks at depth, how much sits at each level, and at how much the stock trades in a day.
Auctions. The trading day does not start with continuous trading. Orders collect before the open, and the exchange runs one auction that matches as many shares as possible at a single price. Before it runs, the exchange publishes the indicative price, the shares that would pair at that price and the imbalance, the size left over on one side. The close works the same way and matters more. Index funds and many institutions trade at the closing price, so the closing auction can be a large slice of the day's volume, especially on days when an index changes its members.
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Frequently asked
- What is the difference between a market order and a limit order?
- A market order buys or sells right away at whatever prices are resting in the order book, so it is certain to fill but not certain of its price. A limit order names the worst price you will accept, so it caps your price but may never fill. A large market order can walk through several price levels and pay more on average than the quote you saw.
- What is a dark pool?
- A private trading venue, usually run by a bank or broker, that does not display orders before they trade. Institutions use dark pools to match large blocks without signaling their size to the market. Trades in a dark pool are still reported publicly right after they happen; only the orders are hidden.
- How do you short a stock?
- You borrow the shares from a long-term holder through securities lending, sell them, and later buy them back to return them. You pay a borrow fee for as long as the short is open, and the lender can recall the shares at any time. Hard-to-borrow names can cost 10 percent a year or more just to stay short.
- What is a good Sharpe ratio?
- The Sharpe ratio is return above the risk-free rate divided by volatility. Over many years, a Sharpe above 1 is very good and above 0.5 is respectable for a long-only portfolio. It treats upside and downside swings the same, so a strategy that quietly sells insurance can show a high Sharpe until a single bad day.
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