When You Sell Stock, Who Buys It and How?
When you sell stock, where does it go? Explore the hidden pathways and diverse entities that acquire your shares in the financial markets.
Selling stock initiates coordinated actions within financial markets. Stock represents a fractional ownership in a company, and its sale involves transferring that ownership to another party. For every share sold, there must be a corresponding buyer, creating a fundamental exchange that underpins the stock market’s operation.
Placing a Sell Order
Selling stock begins when an investor places a sell order through their brokerage account. To do this, the investor provides the stock’s ticker symbol, the number of shares, and the desired order type.
Two common types of sell orders are market orders and limit orders. A market order instructs the broker to sell the shares immediately at the best available price in the market. While it guarantees execution, the exact price received may vary slightly due to rapid market fluctuations. In contrast, a limit order provides more control by specifying a minimum price the investor is willing to accept for their shares. This order will only execute if the stock’s price reaches that specified limit price or higher, with no guarantee of fill if the price is not met.
The Market Mechanism
Once a sell order is placed with a broker, it is then routed to a trading venue for execution. This process, known as order routing, directs the order to a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq, or to an alternative trading system.
Market makers play a role in this mechanism by facilitating liquidity in the market. These entities continuously provide “two-way quotes,” meaning they quote prices for both buying and selling. They profit from the bid-ask spread, which is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask). When a sell order enters the market, the mechanism works to match it with a corresponding buy order, often facilitated by market makers.
The Ultimate Buyers
The buyers of stock come from diverse segments of the financial world, each with distinct investment objectives. Individual investors, often referred to as retail investors, purchase shares for their personal portfolios, similar to the seller. These individuals typically invest smaller amounts compared to other market participants.
Institutional investors represent large organizations that manage and invest substantial amounts of money on behalf of clients or beneficiaries. This category includes mutual funds, pension funds, hedge funds, and insurance companies. Their large-volume trades can significantly influence market prices due to their collective buying power.
High-frequency trading (HFT) firms also participate as buyers, using sophisticated algorithms and technology to execute a vast number of trades at extremely high speeds. These firms often act as market makers, profiting from small price discrepancies and contributing to market liquidity. Additionally, a company itself may repurchase its own shares through corporate buybacks, reducing the number of outstanding shares in the market.
Settlement and Transfer
After a buy and sell order are matched and executed, the transaction enters the settlement phase. Settlement refers to the process where ownership of the stock is transferred from the seller to the buyer, and funds are transferred from the buyer to the seller. In the United States, most stock transactions now settle on a T+1 basis, meaning one business day after the trade date. This represents a recent change from the previous T+2 settlement cycle.
Clearinghouses play a central role in this final stage, acting as intermediaries to guarantee the transaction’s completion. These entities reduce risk by ensuring that both parties fulfill their obligations. They facilitate the physical delivery of assets and the transfer of funds.