Brokers and exchanges

Two different jobs

When you buy a share, two kinds of institution do the work. A broker acts for you: it takes your order, sends it to the market and looks after what you buy. A stock exchange is the marketplace itself: it brings buyers and sellers together and records the prices at which they trade.

You deal only with your broker. An exchange deals only with its members and other professional firms, which is why a private person cannot walk into an exchange and buy a share.

What a broker does

To invest, you open a brokerage account. It is like a bank account, except that it holds shares and other investments as well as cash. Through it, your broker:

• takes your orders — through an app, a website or by phone — and sends them to the market;
• holds your investments and cash, and shows you what you own and what it is worth;
• handles what comes afterwards — dividends paid into your account, statements, the documents you need for taxes.

Before opening an account, a broker checks who you are and where your money comes from; the law requires this in most countries. Brokers are licensed and supervised by a financial regulator, and checking that a broker holds a licence where it operates is one of the simplest protections an investor has.

What an exchange does

An exchange is a marketplace with strict rules. At every moment it holds a list of orders: people wanting to buy at various prices, and people wanting to sell. The highest price any buyer is offering is the bid; the lowest price any seller will accept is the ask. When a buy and a sell meet at a price, the exchange matches them and a trade happens. The price of the latest trade is the share price you see on your screen.

The New York Stock Exchange and Nasdaq are the largest exchanges in the United States. Your broker may also send your order to another regulated trading venue. The idea is the same: your buy is matched with someone’s sell.

How a buy order travels

1. You decide. You choose a share, how many, and a type of order. A market order buys at the best price available now. A limit order sets the highest price you will pay and waits until it can be filled at that price or lower.
2. Your broker checks it and sends it on. It checks that you have the cash, then passes the order to an exchange or another venue.
3. It is matched with a seller. Your buy meets a sell at a price — for a widely traded share, often within a fraction of a second. The price is now fixed and the trade is done.
4. Settlement. The money leaves your account and the share arrives in it for good. This last step is called settlement, and it takes a little time.

Settlement: T+1

Settlement times are written as “T+” a number: T is the trade date, and the number is how many business days later the money and the shares are finally exchanged. Since May 2024, most US share trades settle on T+1, one business day after the trade. A share bought on a Monday settles on Tuesday; one bought on a Friday settles on the following Monday.

In most accounts the share shows up straight away, and its price moves count for you from the moment the trade is done. Settlement matters most for when the cash from a sale can be withdrawn.

Who holds your shares

When you buy a share through a broker, it is held for you in your account: you are its owner, and the broker looks after it. This is called custody. In most regulated markets, a broker must keep its clients’ shares and cash separate from its own money, and the official record of who owns which securities is kept by a central depository — an institution whose job is exactly that.

That separation matters. If a broker runs into trouble, its clients’ shares are not the broker’s to spend. Protections differ from country to country, and it is worth reading what yours are before you open an account. The path Your first portfolio, from Azerbaijan covers this in detail.

The fees along the way

Every step can cost something. The names differ from broker to broker, but the kinds are few:

• Commission — a fee for each trade, a fixed amount or a percentage. Some brokers charge none on some trades and earn in other ways.
• The spread — the gap between the bid and the ask. If you bought at the ask and sold at once at the bid, you would lose the difference.
• Currency conversion — buying US shares with manats means changing money into dollars, and the rate you get usually includes a margin for the broker or bank.
• Account and custody fees — a monthly or yearly charge for keeping the account, and sometimes fees for withdrawing money or moving shares to another broker.

Fees that look small per trade add up when you trade often or invest small amounts. Every broker publishes its full list of charges, usually called a fee schedule or tariff; it is worth reading before you open an account.

In short

Your broker is your agent: it takes your orders, holds your shares and cash, and reports to you. The exchange is the marketplace where your order meets a seller’s. After the match, settlement — one business day for most US shares — completes the exchange, and your holdings are kept apart from the broker’s own money. Each step can carry a fee, and fees come straight out of what you earn.