The Stock Market Explained in Simple Terms

The stock exchange plays a central economic role, as it offers companies the opportunity to raise capital through an initial public offering (IPO) or the issuance of bonds. They can use this capital for investments, research or growth and thus contribute to the development of the entire economy.

Basically, the stock exchange is a large, organized marketplace where securities such as shares are traded instead of apples or pears. Buyers and sellers do not meet in person, but are brought together via electronic trading systems. These systems ensure that clear rules are followed, trade is fair and an up-to-date market price is available at all times. The price of a share results from the interplay of supply and demand. When many investors want to buy a particular stock, the price rises while it falls when more people are selling than buying. A simple example: If a company announces very good business figures, many investors want to buy its shares and the price climbs up. Bad news, on the other hand, can lead to a price decline.

Order Types

When an investor wants to buy or sell a stock, there are different types of orders available to them, which work differently. Below you will find an overview of the most important order types available to private customers.

An unlimited order, also known as a market order or best order, means that the stock is immediately bought or sold at the current best available price. This has the advantage that the order is executed directly, but the exact price is not fixed in advance. If there are not enough pieces available at the desired price, the rest will automatically trade at the next best price. For example, if you want to buy 100 shares, 60 shares may be executed first at CHF 50 and the remaining 40 shares immediately afterwards at CHF 50.10 because there were not enough sellers in the market at CHF 50.

With a limit order, you determine in advance exactly at what price you want to buy or sell. This ensures that you never pay more or receive less than intended. However, the downside is that if the market price doesn't reach your limit, the trade may not happen at all. Suppose you want to buy a share for a maximum of CHF 50, but the price is currently CHF 51, then the order will not be executed until the price falls to CHF 50 or lower.

Note: It is generally advisable to always use limited orders when placing orders. This can prevent a security from being bought or sold at an unfavourable price – especially in markets with low liquidity or high volatility. Limit orders give investors control over the maximum buy price or the minimum sell price, thus protecting against unexpected price movements.

Stop Orders

In addition, there are stop orders, which are primarily used to limit losses or secure profits without the investor having to constantly follow the stock market prices.

In a classic stop-loss order, the investor sets a certain price, a so-called trigger. If this is reached during a sale, for example, a sell order is automatically triggered. This order is then executed "in the best possible way", i.e. at the current best possible price. However, in a market with strong price fluctuations or few buyers, this price can be significantly lower than the originally set stop price. This means that the stock may be sold at a significantly lower price than intended.

To reduce this risk, there is the stop-limit order. In addition to the trigger, a limit is also set at which the stock is to be sold. Once the trigger is reached, the sell order will only be executed if the price does not fall below the set limit. If the price falls below this for a short time, no sale will take place. It will only be possible again if the price rises again to or above the limit after a decline.

Stop orders can be recorded as both sell and buy orders.

Trading Day

A trading day on the Swiss Stock Exchange is divided into several phases.

Pre-Opening – Preparation in the Morning

The stock market day starts early: It starts at 6 a.m. At this point, all orders that customers have entered with their bank overnight are automatically transmitted to the exchange system.

Even after that, new orders can still be entered and existing orders can be changed or deleted – conveniently via e-banking or in consultation with the bank. This phase before the actual market opening is called the pre-opening phase. It makes it possible to position oneself in the market at an early stage.

Important: No trading takes place during this time. So no shares are bought or sold yet and there are no official prices yet. The exchange only collects the orders so that they can be executed at the opening or in the course of the rest of the trading day.

Opening – The First Price of the Day Is Created

At 9:00 a.m., the actual opening of the trade begins. Now the so-called opening price is set for each share. This is done in the opening auction according to the most-execution principle. This means that the stock exchange determines the price at which as many shares as possible can change hands at the same time.

The opening does not take place exactly at 9:00 a.m., but within a random time span of no more than two minutes, i.e. between 9:00 a.m. and 9:02 a.m. This avoids market manipulation and strategic order placement. Once the opening price is set, trading transitions to continuous trading.

Continuous Trading – Now Buying and Selling Is Ongoing

After the opening, the so-called continuous trading begins. At this stage, the buy and sell orders available in the system are continuously checked against each other and executed in accordance with the rules of the exchange.

Orders remain in the trading system until they have been fully executed, are deleted or expire. The duration of the order validity determines how long the order should remain in the exchange system. As a rule, the orders are valid on a daily basis, unless they are scheduled for a specific date.

Closing Auction – The Last Price of the Day Will Be Determined

Trading will be suspended from 17:20 to 17:30. During this time, new orders can be entered and existing orders can be changed or deleted. Between 5:30 p.m. and 5:32 p.m., as in the opening auction, a closing price is set for each share according to the most-execution principle, so that as many shares as possible can be traded at the same time.

The closing price is the last official price of the day and has a special significance because it is often used for fund valuations, indices or portfolio valuation.

TAL Period – Trading at the Closing Price

After the closing auction, the TAL period (Trading at Last) begins. Shares can be traded at the fixed closing price until 5:40 p.m. In this phase, you have the option of buying or selling shares at a known closing auction price even after the auction – provided there are orders from the other side. Since there is no pre-trade transparency at this stage, it is not clear which orders are present in the order book.

Post-Trading

Trading ends at 5:40 p.m. No further trading takes place during this phase. All unexecuted orders valid for that day are deleted at the end of the TAL phase, i.e. at the start of after-hours trading. You can enter new orders for the next trading day, even if these will not be processed until the following day.

Important Note:

The exact procedures and times may vary depending on the stock market segment.