Explain like I'm 5...

[Le Poisson]

So although I've been here for way too long, and even though I'm supposed to know this stuff, there are a few niggl;ing things that I have never figured out. Please dummies, join in with me with your stupid questions. Geniuses, please help me understand.

Question 1: When I'm selling, who's buying?

I decide it's time to sell a stock. I go on my online trade platform, tell it I wanna sell 24 shares of "Wally's Bait-n-Worms" at market price, good until close. I hit the sell button. Immediately the trade goes through - despite Wally's being a tiny company that is hardly trading any volume at all. Who did I just sell my shares to?

- Did Wally's buy them back?
- Did Questrade (my trading platform) buy them from me?
- Did some other person have a trade waiting at a set price?

What happens to the shares when you hit sell?

[Le Poisson]

Question #2: Why do people care so much about the SPY?

I know that the SPY is an ETF that tracks the Standard and Poors 500 - the most traded public companies in the US. But more than a few folks online us the SPY as a benchmark of the market in general. Is the thinking that if the giants are doing poorly/well then the rest of the market will follow suit? Doesn't this miss all the arguments for emerging tech and emerging markets? What inferences are we (Mustachians) with mostly boring ETF portfolios supposed to be making from the SPY?

[wageslave23]

So although I've been here for way too long, and even though I'm supposed to know this stuff, there are a few niggl;ing things that I have never figured out. Please dummies, join in with me with your stupid questions. Geniuses, please help me understand.

Question 1: When I'm selling, who's buying?

I decide it's time to sell a stock. I go on my online trade platform, tell it I wanna sell 24 shares of "Wally's Bait-n-Worms" at market price, good until close. I hit the sell button. Immediately the trade goes through - despite Wally's being a tiny company that is hardly trading any volume at all. Who did I just sell my shares to?

- Did Wally's buy them back?
- Did Questrade (my trading platform) buy them from me?
- Did some other person have a trade waiting at a set price?

What happens to the shares when you hit sell?

Someone else had a buy order in up to a set price is the simplest answer.  Questrade is the intermediary.  Stocks with little volume list the last trade price, asking price, and bid price.  They won't trade until there is a match between someone willing to sell and someone willing to buy at the same price.

[wageslave23]

Question #2: Why do people care so much about the SPY?

I know that the SPY is an ETF that tracks the Standard and Poors 500 - the most traded public companies in the US. But more than a few folks online us the SPY as a benchmark of the market in general. Is the thinking that if the giants are doing poorly/well then the rest of the market will follow suit? Doesn't this miss all the arguments for emerging tech and emerging markets? What inferences are we (Mustachians) with mostly boring ETF portfolios supposed to be making from the SPY?

The SP 500 encompasses the majority of traded US equities.  Its an easy to track relatively representative index.  I don't hear people talking about SPY as the market in general.  Usually I hear the SP500 index is at 4500 or up .6% on the day.  And the person is implying that the US stock market is up .6%.  But its more accurate to just say what you mean, i.e. the Dow is up 1.2% or the Nasdaq is down .3%.  If you are talking about emerging markets, then quoting a stock exchange like the Shanghai would be most accurate.  Or if you are talking about a foreign index then quote the specific foreign index.  So in summary, its just people being lazy because quoting SPY and refering to it as "the market" is good enough.

[vand]

There is always a counterparty on the other end of every buy AND sell. Your selling is someone else's buying and vice versa.

Markets are clearing mechanisms - and modern financial markets are unbelievably efficient at this. But there are all types of other entities operating in the markets than just long term investors - HFT, day traders, position traders, hedgers, institutional investors, private investors... you get the idea. You never know who is actually on the other end of the trade and it is that way by design. 

There is a clearing process in the background that is actually very well defined.. that's why you sometimes hear of the T+2 settlement term.  It's incredibly robust, too. I think there's something like 5 layers of firewall to protect the system, and in reality even the first level has never been breached.

[sonofsven]

So although I've been here for way too long, and even though I'm supposed to know this stuff, there are a few niggl;ing things that I have never figured out. Please dummies, join in with me with your stupid questions. Geniuses, please help me understand.

Question 1: When I'm selling, who's buying?

I decide it's time to sell a stock. I go on my online trade platform, tell it I wanna sell 24 shares of "Wally's Bait-n-Worms" at market price, good until close. I hit the sell button. Immediately the trade goes through - despite Wally's being a tiny company that is hardly trading any volume at all. Who did I just sell my shares to?

- Did Wally's buy them back?
- Did Questrade (my trading platform) buy them from me?
- Did some other person have a trade waiting at a set price?

What happens to the shares when you hit sell?

You don't decide the price when you're selling, the "market" does, and Questrade just tells you what that price is.
That price is determined by the buyer. Someone wants to buy shares at this price, will you sell them? Yes or no.
If yes, the sale goes through.
If no, you can set a higher price that you want to sell at and wait for a buyer to agree to that price.

[Telecaster]

Question #2: Why do people care so much about the SPY?

I know that the SPY is an ETF that tracks the Standard and Poors 500 - the most traded public companies in the US. But more than a few folks online us the SPY as a benchmark of the market in general. Is the thinking that if the giants are doing poorly/well then the rest of the market will follow suit? Doesn't this miss all the arguments for emerging tech and emerging markets? What inferences are we (Mustachians) with mostly boring ETF portfolios supposed to be making from the SPY?

Good question.   The answer is tradition, mostly.   The S&P 500 and its predecessors date back to the 1920s, so there is quite a bit of historical data on how markets work.  Nowdays we've have all kinds of data at our finger tips, but even 25 years ago that wasn't the case.   

To the second part of your question, portfolio construction is a deep rabbit hole with all kinds of branches, and there are all kinds of things that are worth considering.   However, SPY's superpower is its simplicity.   It is possible to construct a portfolio that beats SPY, but not by a lot and not in any given year and requires some work and study.      SPY gives you outstanding performance and it is fire and forget.   

[Samuel]

RE: SPY... It's because the companies in the S&P 500 represent 80% of the total U.S. equity market capitalization. They're monsters that also dominate any alternative index trying to track the total market.

And it's been around a long time.

[Dr. Pepper]

It's my understanding that as a retail trader generally you are not selling directly to the end buyer. Your typically going through a middle man, the market maker. Market makers will quote a bid and ask price, when you want to sell they will buy from you and hold the security as an intermediary until it can be sold to someone else. This improves liquidity (your ability to buy or sell when you want to) and earns the market maker a spread on the bid and ask. The market maker also gets to sell your order flow to third parties that can use the information to trade in front of you. You will not notice this as it happens in miliseconds and involves hundreths of a cent, but it does increase the cost to trade for retail.

There was a book called Flash Boys written by Michael Lewis that goes into some of the dynamics of order execution and order flow and is a good read if you have time.

For the SPY (ETF), allows you to trade the index as if it were a single stock, buy options against it etc. It's a favorite for people to speculate on market movements.

[nereo]

RE: SPY... It's because the companies in the S&P 500 represent 80% of the total U.S. equity market capitalization. They're monsters that also dominate any alternative index trying to track the total market.

And it's been around a long time.

Yup. Those companies also employ over 25 million people directly and are the primary client for another estimated 40 million people (ie contract employees and smaller businesses which are suppliers for provide services to these companies). Not even the federal government with the US military bundled in represents as many workers and money.

[partgypsy]

So although I've been here for way too long, and even though I'm supposed to know this stuff, there are a few niggl;ing things that I have never figured out. Please dummies, join in with me with your stupid questions. Geniuses, please help me understand.

Question 1: When I'm selling, who's buying?

I decide it's time to sell a stock. I go on my online trade platform, tell it I wanna sell 24 shares of "Wally's Bait-n-Worms" at market price, good until close. I hit the sell button. Immediately the trade goes through - despite Wally's being a tiny company that is hardly trading any volume at all. Who did I just sell my shares to?

- Did Wally's buy them back?
- Did Questrade (my trading platform) buy them from me?
- Did some other person have a trade waiting at a set price?

What happens to the shares when you hit sell?

You don't decide the price when you're selling, the "market" does, and Questrade just tells you what that price is.
That price is determined by the buyer. Someone wants to buy shares at this price, will you sell them? Yes or no.
If yes, the sale goes through.
If no, you can set a higher price that you want to sell at and wait for a buyer to agree to that price.

This is a great way of explaining it