Stock Market Basics
What a share actually is, how exchanges work, and the hidden cost every trade pays.
What Is a Stock?
A share of stock is a small piece of ownership in a company. If a company has 1,000,000 shares outstanding and you own 1,000 of them, you own 0.1% of that company — including a proportional claim on its profits and assets.
"Market capitalization" (market cap) is simply share price × shares outstanding. A $50 stock with 2 billion shares outstanding is a $100 billion company, even though $50 sounds small.
How a Trade Actually Happens
Stocks trade on exchanges (like the NYSE or Nasdaq) where buyers and sellers are matched electronically. At any moment there is a "bid" (the highest price someone is willing to pay) and an "ask" (the lowest price someone is willing to sell for). The gap between them is the bid-ask spread.
When you place a "market order," you don't get the bid or the ask — a buy fills at the ask, a sell fills at the bid. That gap is a real, invisible cost you pay on every single trade.
Rare but important
Most beginners only think about whether a stock goes up or down. But every round-trip trade (buy then sell) crosses the bid-ask spread at least once, often twice. On a liquid stock like Apple the spread is a penny or two — negligible. On a thinly traded small-cap, the spread can be 1-2% of the price. That means the stock has to move 1-2% in your favor just for you to break even, before any real gain. Always check the spread before trading illiquid names.
Worked Example
Problem: Stock XYZ shows a bid of $49.90 and an ask of $50.10. You buy 100 shares at market, then immediately change your mind and sell all 100 shares at market, with no price movement in between. How much did you lose purely to the spread?
- Your buy order fills at the ask: $50.10 × 100 shares = $5,010.00 spent.
- Your sell order fills at the bid: $49.90 × 100 shares = $4,990.00 received.
- Net loss = $5,010.00 − $4,990.00 = $20.00, or about 0.4% of your position — and the stock price itself never moved at all.
- Lesson: on wide-spread stocks, a small favorable price move can still be a net loss after the spread. Always compare the spread size to your expected profit target.