What happens when you place a stock trade
When you buy or sell a stock, you send an order to a broker — a company licensed to execute trades on your behalf. The broker routes your order to an exchange (like the New York Stock Exchange or NASDAQ), where it matches with someone on the other side: a seller if you're buying, a buyer if you're selling. The trade settles in two business days, meaning the money and shares change hands on that timeline, not when ready.
The price you see on your screen is not may provide. If you place a market order — an instruction to buy or sell at whatever the current price is — you might pay more or less than the quoted price by the time your order reaches the exchange, especially if the stock moves fast or if you're trading a stock that doesn't trade often. A limit order lets you set a maximum price you'll pay (when buying) or a minimum price you'll accept (when selling), but your order might not fill at all if the stock never reaches that price.
You need a brokerage account to trade. You open one with a broker, deposit money, and that cash sits in your account until you use it to buy shares. When you sell shares, the proceeds land back in your account as cash. Most brokers charge no commission on stock trades anymore, but they make money through other means: interest on cash balances, lending your shares to short-sellers, or selling data about your trades.
Key Takeaways
- A market order buys or sells at the current price, which may differ from what you see on screen; a limit order sets a price floor or ceiling but might not fill.
- Trades settle in two business days, so your money and shares don't move when ready even though the order executes right away.
- You pay no commission at most brokers, but you do pay the bid-ask spread — the difference between what buyers will pay and what sellers will accept — every time you trade.
- Brokers hold your shares in a brokerage account and can lend them to other traders or use your cash balance to generate their own revenue.
- Buying on margin (borrowing from your broker to buy more shares than you have cash for) multiplies both gains and losses and carries interest costs.
Market orders versus limit orders and when each makes sense
A market order executes when ready at the best available price. If you're buying Apple stock and the last trade was at $150, your market order will likely fill at or very close to that price — but not always. In a fast-moving market or with a thinly traded stock, the price could jump before your order reaches the exchange. You get certainty of execution but uncertainty of price.
A limit order lets you name your price. You say "buy Apple at $149 or less" or "sell Apple at $151 or more." If the stock never reaches your limit, your order sits unfilled. You get price certainty but no may provide the trade happens. Limit orders are useful when you're not in a rush, when the stock is volatile, or when you're trading something that doesn't move much volume.
Most traders use market orders for stocks that trade heavily (like major index components) because the bid-ask spread is tight and execution is nearly when ready. Limit orders make more sense for smaller stocks, for trades you're willing to skip if the price doesn't cooperate, or when you're trying to avoid buying at a temporary spike.
The bid-ask spread and other costs that reduce your returns
Every stock has a bid price (what buyers will pay right now) and an ask price (what sellers will accept right now). The difference is the bid-ask spread. If Apple's bid is $150.00 and the ask is $150.05, the spread is five cents. When you buy, you pay the ask. When you sell, you receive the bid. That spread is a real cost that comes out of your return, and it happens on every trade.
Spreads vary wildly. Heavily traded stocks like Apple or Microsoft might have spreads of one or two cents. Smaller stocks or exchange-traded funds with less volume might have spreads of 10 cents, 25 cents, or more. The less frequently a stock trades, the wider the spread, because market-makers face more risk holding the shares between buyers and sellers.
Beyond the spread, watch for other costs. Some brokers charge fees for certain order types (stop orders, trailing stops) or for holding certain securities. If you trade on margin, you pay interest on the borrowed money — rates vary by broker and by how much you borrow. Account inactivity fees are rare now but still exist at some brokers. Currency conversion fees explore if you buy foreign stocks. None of these are huge individually, but they compound over time and eat into gains.
How settlement works and why you can't use proceeds when ready
When your trade executes, it's done — but the money and shares don't move for two business days. This is called T+2 settlement (trade date plus two days). On day one, you and the seller agree on the price. On day two, the exchange confirms the trade. On day three, the shares move to your account and the cash moves to the seller's account.
During those two days, you own the shares (you can vote them, receive dividends), but you can't sell them again and use the proceeds to buy something else on the same day. If you sell a stock on Monday, you can't use that cash to buy another stock until Wednesday at the earliest. Some brokers offer "when ready settlement" or "same-day settlement" for certain account types, but this is not standard and may carry restrictions or fees.
This matters most if you're a frequent trader. If you buy and sell the same stock multiple times in a short window, you might run into good-faith violation rules. If you're a pattern day trader (someone who makes four or more day trades in five business days), your broker will require you to maintain a minimum account balance of $25,000. If you fall below that, you can't day trade until you bring the balance back up.
Buying on margin and how leverage amplifies both gains and losses
Most brokers let you borrow money to buy more shares than you have cash for. This is called buying on margin. If you have $10,000 in your account and your broker allows 2:1 margin, you can borrow $10,000 and buy $20,000 worth of stock. If the stock rises 10 percent, your $20,000 position is now worth $22,000 — a $2,000 gain on your $10,000 investment, or 20 percent return. But if the stock falls 10 percent, your position is worth $18,000 — a $2,000 loss, or 20 percent loss.
Margin amplifies both directions. You pay interest on the borrowed money (rates vary by broker, typically 5 to 12 percent annually), and your broker can force you to sell shares if your account value falls below a certain threshold. This is called a margin call. If you can't deposit more cash, the broker sells your shares at whatever price they can get, locking in losses. Margin is a tool for experienced traders; most beginners should avoid it.
Margin requirements vary by security and by broker. Stocks typically allow 50 percent margin (you can borrow up to half the purchase price). Some brokers offer higher margin on certain stocks or for accounts with large balances. Options and futures have different rules entirely. Always read your broker's margin agreement before borrowing.
Different order types and when to use them
Beyond market and limit orders, brokers offer several other order types. A stop order (or stop-loss order) tells your broker to sell if the price falls to a certain level. If you own Apple at $150 and set a stop at $145, your broker will sell if Apple hits $145 — useful for cutting losses, but the sale happens at market price, which could be lower than $145 in a fast-moving market. A stop-limit order combines the two: sell if the price hits $145, but only at $145 or higher. If the stock gaps down past $145, your order won't fill.
A trailing stop sets a stop price that moves up as the stock rises. If you set a trailing stop of 5 percent on a $150 stock, your stop is at $142.50. If the stock rises to $160, your stop moves up to $152. If it then falls to $152, you sell. Trailing stops lock in gains while letting winners run, but they can also sell you out of a stock during a normal pullback.
An all-or-nothing order (AON) won't fill unless the entire quantity you requested can be bought or sold in a single transaction. A fill-or-kill order (FOK) is similar but cancels when ready if it can't fill completely. These are useful when you need a specific quantity and don't want a partial fill, but they're less common for individual stock trades.
Tax consequences of buying and selling stocks
When you sell a stock for more than you paid, you have a capital gain. When you sell for less, you have a capital loss. The tax you owe depends on how long you held the stock. If you held it for one year or less, it's a short-term capital gain, taxed as ordinary income at your regular tax rate. If you held it for more than one year, it's a long-term capital gain, taxed at a lower rate (0, 15, or 20 percent depending on your income, as of 2024).
You can use capital losses to offset capital gains. If you had $5,000 in gains and $3,000 in losses, you owe tax on $2,000 of net gain. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income in a single year, and carry forward any remaining losses to future years.
Dividends are also taxable. may have access to dividends (from U.S. stocks held for at least 60 days around the ex-dividend date) are taxed at long-term capital gains rates. Non-may have access to dividends are taxed as ordinary income. Your broker sends you a 1099 form in January showing all your gains, losses, and dividends for the prior year.
How to choose a broker and what to compare
Most brokers now charge zero commission on stock trades, so the main differences are features, research tools, customer service, and account minimums. Some brokers (like Fidelity, Charles Schwab, and E*TRADE) are full-service firms with extensive research, educational content, and phone support. Others (like Robinhood or Webull) are app-first and cheaper to operate but offer fewer tools.
Check whether the broker offers the order types you need, whether they have margin available if you want it, and whether they offer fractional shares (letting you buy partial shares for less money). Look at the bid-ask spreads on the stocks you plan to trade — some brokers route orders better than others, and spreads can vary. Read reviews about execution speed and customer service, especially if you plan to trade frequently.
Account minimums have largely disappeared, but some brokers still require a minimum deposit to open an account or to access certain features. Verify that the broker is registered with the SEC and that your cash and securities are protected by SIPC (Securities Investor Protection Corporation), which covers up to $500,000 per account if the broker fails.
Frequently Asked Questions
Can I buy a stock and sell it the same day?
Yes, but if you do this four or more times in five business days, you'll be flagged as a pattern day trader and your broker will require you to maintain $25,000 in your account. If your balance falls below that, you can't day trade until you deposit more money. This rule applies to margin accounts; cash accounts have different restrictions.
What's the difference between a stock exchange and a broker?
An exchange (like NYSE or NASDAQ) is where trades actually happen — it's the marketplace. A broker is a company that connects you to the exchange and executes your orders. You can't trade directly on an exchange; you must go through a broker.
Why does my order sometimes fill at a different price than I expected?
Market orders execute at the best available price at the moment your order reaches the exchange, which might be different from the price you saw on your screen. Delays in data transmission, fast-moving markets, and low trading volume can all cause price slippage. Limit orders prevent this by setting a price ceiling or floor, but they might not fill at all.
Do I have to pay taxes on stocks I still own?
No. You only owe capital gains tax when you sell. Dividends are taxable in the year you receive them, even if you reinvest them. Once you sell, you report the gain or loss on your tax return for that year.
What happens if my broker goes out of business?
Your cash and securities are protected by SIPC up to $500,000 per account. If the broker fails, SIPC arranges for another firm to transfer your account, or it liquidates your holdings and pays you the proceeds. This protection is automatic; you don't need to do anything.