Market mechanics
A market mechanism is what actually happens behind a number you see: a price that moves, a fund unit worth what it holds, a dividend added somewhere. This section explains those machines one at a time, without ever saying what to do with them.
It starts with what a stock is and what its market capitalization measures, then a bond, then what an index is and what an ETF is — the objects found in any portfolio. It goes on with how a price forms, how orders work and what a trading halt does to them, what splits and dividends change and the vote a share carries, then diversification and compound interest, two pieces of arithmetic rather than two pieces of advice. It ends with fees and liquidity, which no quote shows but every return carries.
Each article stands on its own; the order below is the reading path, and it is the shortest way to understand the next one.
- What exactly is a stock?A stock is a share of ownership in a company.
- What is a bond?A stock is a share of ownership; a bond is a loan.
- What is an ETFAn ETF — exchange-traded fund — is a basket of securities that is bought and sold on an exchange like an ordinary stock.
- Where a stock price comes fromThe price shown for a stock is not set by anyone — not by the company, not by the exchange, not by a central computer.
- Market order, limit orderPlacing an order means choosing what you guarantee: that the trade happens, or the price at which it happens.
- Splits, consolidations, dividends: what changes and what does notSome events change the number of shares you hold without your having bought or sold anything.
- Diversification, mechanically"Don't put all your eggs in one basket" is the oldest saying in finance — but behind the adage there is also a precise mechanism.
- Compound interest, friend and foeCompound interest is presented everywhere as the "eighth wonder of the world". The formula is exact — but incomplete.
- The management expense ratio (MER)The management expense ratio — MER — is the annual cost of a fund or an ETF, expressed as a percentage of assets.
- ETFs and mutual funds: the differencesAn ETF (exchange-traded fund) and a mutual fund do the same thing at bottom: they pool money from many people to hold a basket of securities, and each person…
- The liquidity of a securityThe liquidity of a security is the ease with which it can be bought or sold without moving its price.
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