Lesson 6: Market Structure & Trading Mechanics

Now that you understand market participants and trading strategies, let’s break down how trades actually happen in the market. This lesson covers: 1. Market Structure – How Securities Are Traded 2. Order Books & Liquidity 3. Bid-Ask Spread & Trade Execution 1. Market Structure – How Securities Are Traded A. Primary vs. Secondary Markets Primary Market: Where securities are first issued (e.g., IPOs, bond issuances). Secondary Market: Where existing securities are traded among investors (e.g., NYSE, Nasdaq). B. Types of Markets Auction Market: Buyers and sellers submit competitive bids and offers (e.g., NYSE). Dealer Market: Dealers act as middlemen and quote prices (e.g., Nasdaq, bond markets). Over-the-Counter (OTC) Market: No centralized exchange, used for smaller stocks and bonds. Dark Pools: Private exchanges used by institutional investors to execute large trades. 2. Order Books & Liquidity A. An order book is a real-time list of buy and sell orders for a security. It includes: Bid Prices: What buyers are willing to pay. Ask Prices: What sellers are willing to accept. Order Size: Number of shares available at each price level. B. Liquidity – How Easy It Is to Buy/Sell? High Liquidity: Tight bid-ask spread, easier to execute trades (e.g., AAPL, MSFT). Low Liquidity: Wider spread, harder to trade large amounts without price impact (e.g., small-cap stocks). 3. Bid-Ask Spread & Trade Execution A. The bid price is the highest price a buyer is willing to pay, while the ask price is the lowest price a seller is willing to accept. The difference is the spread. Tight Spread: Highly liquid stocks (e.g., VOO: $430.10 / $430.12). Wide Spread: Low-liquidity stocks (e.g., Small-cap: $7.20 / $7.80). B. How Trade Execution Works 1. You place an order (market, limit, stop-loss, etc.). 2. The order is routed to an exchange or market maker. 3. If a match is found, the trade executes at the best available price. C. Market Orders vs. Limit Orders Order Type Execution Best For Market Order Immediate execution at the best available price High-liquidity stocks, fast execution Limit Order Executes only at a specific price or better Controlling entry/exit prices, low-liquidity stocks Stop-Loss Order Converts to a market order when a set price is hit Protecting against big losses Stop-Limit Order Converts to a limit order at a set price Avoiding slippage but may not execute

Next Steps

Now that you understand how orders are placed and executed, the next lesson will cover risk management strategies, including stop-losses, portfolio diversification, and position sizing.