You know, everyday millions of people
buy stocks with nothing more than a tap
on their phone. It feels instant. It
feels simple. But the moment you press
that buy button, your money begins a
journey through one of the most complex
financial systems ever built. And today
we're going to follow that journey.
Welcome to A Lux.
First of all, you never buy from Apple.
When someone says they bought Apple
stock, it sounds simple enough, right?
Open up an app, type in AAPL, choose how
many shares to buy, press the button,
and a few seconds later you're
officially an Apple shareholder. The
money is gone from your account, the
shares appear in your portfolio, and it
feels like a direct transaction between
you and one of the biggest companies in
the world. Except, almost none of that
is what actually happened. In fact,
Apple probably never saw your money. And
that sounds impossible at first because
buying a product usually means paying
the company that made it. Buy an iPhone
and Apple gets the revenue. Buy a coffee
and the cafe gets the money. Buy a
ticket to a concert and the artist or
promoter gets paid. [music] Every
purchase follows the same basic pattern.
Money flows from the customer to the
producer. Stocks [music]
do not work that way. The stock market
is one of the few places where billions
of dollars change hands every day
without most of that money ever reaching
the companies whose names are on the
screen.
>> [music]
>> On a typical trading day, hundreds of
billions of dollars worth of shares are
bought and sold in the US alone. Apple
is one of the most actively traded
stocks in the world with tens of
billions of dollars in transactions
passing through the market in a single
day. Yet, almost every dollar exchanged
is simply moving between investors, not
into Apple's bank account. That raises
an obvious question though. If Apple
isn't receiving the money, then
>> [music]
>> who is? Well, that answer begins with
understanding that there are really two
different stock markets even though most
people think there's only one. The first
is the primary market. This is where a
company creates a brand new shares and
sells them to investors in exchange for
cash. That cash goes directly to the
company that can be used to build
factories, hire employees, develop
products, or expand into new markets.
This is what happens during an initial
public offering, better known as an IPO.
When Airbnb went public in 2020, it sold
newly issued shares to investors and
raised billions of dollars for the
business. The money flowed into Airbnb
because those shares did not exist
before the company created them. That's
probably the version of the stock market
that most people imagine. The problem is
that only happens occasionally. Once
those newly created shares are out in
the world, they start changing hands
between investors. Someone buys because
they believe the company will become
more valuable. Someone sells because
they want the cash, think the stock is
fully priced, or simply need the money
for something else. The company isn't
involved in that decision. It doesn't
approve the trade, negotiate the price,
or receive any of the cash. It simply
has its name attached to the asset that
being exchanged. This is called the
secondary market, and it's where almost
every stock purchase takes place.
Imagine buying a used car. The
manufacturer doesn't receive another
payment just because the car has a new
owner. The money goes to the previous
owner because they're the one selling
the asset. And stocks work the same way.
When you buy one share of Apple through
your brokerage account, you're almost
certainly buying it from another
investor somewhere in the market. That
seller receives your money, gives up
ownership of the share, and walks away
with cash. Apple continues designing
iPhones completely unaware that the
transaction ever happened. This
distinction matters because it changes
the way companies think about their
stock price. A rising share price
doesn't automatically put more money
into Apple's bank account. What it does
is create opportunity. A higher stock
price makes it easier to raise capital
in the future by issuing new shares if
the company ever chooses to. It also
gives Apple a valuable currency it can
use to acquire other businesses through
stock-based deals and help attract
employees by making stock compensation
more appealing. The market isn't sending
Apple cash every time someone buys a
share, but it constantly is upgrading
what the company is worth in the eyes of
millions of investors. So, by this
[music] point, the stock market already
looks pretty differently than most
people imagine. Pressing buy didn't send
your money to Apple, it sent your money
to another investor who happened to own
the shares you wanted. But that only
explains where the money ends up.
There's also the invisible middleman to
consider here. Because the moment you
press the buy button, your order begins
a journey that is measured in
milliseconds, but involves an entire
industry working behind the scenes. It
feels as though your brokerage simply
finds someone willing to sell and
completes the trade. And that would be a
reasonable assumption, but it hasn't
described how the market works for a
very long time. So, let's follow that
order. So, say you decide to buy one
share of Apple on an app like Robinhood,
Fidelity, Charles Schwab, or Interactive
Brokers. The first thing that happens is
surprisingly ordinary. Your broker
receives your order. At this point,
nothing has been bought yet. The broker
simply knows that you want to own one
share and are willing to pay the current
market price. [music] Now, years ago,
that order would have likely been sent
directly to a stock exchange like the
New York Stock Exchange or Nasdaq, where
buyers and sellers meet. Today, that is
often not what happens. Instead, your
order may be routed to a market maker.
Most people have never heard of
companies like Citadel Securities, Virtu
Financial, Jane Street, or Susquehanna.
Yet, they handle an enormous share of
all stock trading in the United States.
On many trading days, Citadel Securities
alone is involved in roughly one out of
every four retail stock trades. [music]
If millions of people are buying or
selling shares through online brokers,
there's a good chance one of these firms
is standing in the middle.
That raises another question. Why?
Wouldn't it be simpler to send every
dollar straight to the stock exchange?
Well, it turns out market makers exist
because waiting for buyers and sellers
to perfectly match would slow the market
down. Imagine walking into a grocery
store to buy a carton of milk only to
discover that you first have to wait
until another customer decides to sell
theirs. Shopping would become
frustrating very quickly. Grocery stores
solve that problem by keeping inventory
on the shelves. Market makers do
something similar with stocks. Instead
of waiting for another investor to
appear at the exact moment with the
exact opposite order, they maintain huge
inventories of shares. If you want to
buy Apple, they can often sell you one
from their own holdings immediately. If
someone else wants to sell Apple a few
moments later, they may buy that share
and add it back into their inventory.
They're constantly buying, selling, and
adjusting their positions, making sure
there's almost always someone ready to
trade. This is why stock purchases feel
almost instant, even though millions of
investors are [music] acting
independently. Now, of course, they
aren't doing this as a public service or
anything. Market makers make money from
something called the bid-ask spread.
>> [music]
>> Every stock has two prices. The bid is
what buyers are currently willing to
pay. The ask [music]
is what sellers currently want to
accept. The difference between those two
prices is usually tiny, often just a few
cents on a heavily traded stock like
Apple, but when you are facilitating
millions of trades every day, those
pennies add up remarkably fast. Imagine
a market maker buys shares for $199.98
and sells them for $200. A profit of 2
cents sounds insignificant until you
repeat that millions of times across
thousands of different stocks. Scale
transforms tiny margins into enormous
businesses. Citadel Securities
reportedly executes billions of shares
every day, and firms like it generate
billions of dollars in annual revenue by
operating on margins that most people
would barely even notice. Now, there's
also another layer that surprises many
investors. Your broker may actually get
paid for sending your order to a
particular market maker. This practice
is known as payment for order flow or
PFOF. Now, instead of charging you
commission every time you trade, some
brokers receive a small payment from
market makers in exchange for routing
customer orders to them. That revenue
helps to fund the commission-free
trading that has become standard across
much of the industry. This model
exploded in popularity over the past
decade. Before commission-free trading
became common, investors often paid
five, 10, or even $20 every time they
bought or sold a stock. Today, millions
of people trade without ever seeing a
commission charged to their account. It
feels free because the economics have
simply moved somewhere else. Payment for
order flow has also been kind of
controversial. Critics argue that
brokers should always send customer
orders to the venue offering the very
best execution, not necessarily the one
paying the broker the highest fee.
Supporters respond that market makers
frequently execute trades at prices that
are actually better than the publicly
quoted market, saving retail investors
money while keeping trading costs close
to zero. Regulators continue to debate
the balance between competition,
transparency, and investor protection,
but one thing is clear. The modern stock
market operates very differently from
the simple image of buyers and sellers
meeting on an exchange floor. And this
is the kind of insight you get for free
here on our YouTube channel, but just
imagine what sits inside the A Lux app
behind a paywall. Yeah, the value back
there is pretty huge, and we're on a
mission to make 1,000 new millionaires,
and we've already crossed 100 so far,
and we'd love for you to be next.
>> [music]
>> So, download the app at alux.com/app and
start your 7-day free trial. When you
realize the value on the inside, come
back and scan this QR code and you'll
get 25% off your annual membership. I'll
see you on the inside, but in the
meantime, let's get back to this video.
So, by now, your Apple purchase has been
matched. The price has been agreed, and
your brokerage app proudly tells you
that you own a share. The strange part
is that, legally speaking, [music] you
still don't actually have the share in
your name. That part of the journey is
only just beginning. So, your brokerage
app now shows one share of Apple sitting
safely in your account. You can see its
value every second. You can sell it
whenever you want, and if Apple pays a
dividend, you'll receive it
automatically. From your perspective,
the transaction is finished. Except,
there's one strange detail. [music] Your
name is probably nowhere on Apple's
shareholder registry. And that sounds
impossible because ownership usually
comes with your name attached to it
somewhere. You buy a house and your name
appears on the title. You buy a car
[music] and the registration lists you
as the owner. Even buying a domain name
or registering a patent creates an
official record connecting that asset to
you. But stocks are different. If you
own shares through a normal brokerage
account, the registered owner of those
shares is almost certainly not you.
Instead, it's an obscure company called
Cede and Co. Almost nobody's ever heard
of Cede and Co. Yet it's arguably one of
the most powerful names in global
finance. It isn't a hedge fund, it's not
a bank, it's not an investment firm. It
doesn't appear on lists of the world's
largest companies. Yet Cede and Co. is
the registered owner of the overwhelming
majority of publicly traded shares in
the US, representing tens of trillions
of dollars in assets. So, how can one
company own almost every stock? The
answer is that it doesn't own them in
the way that most people think. To
understand why Cede and Co. exists, it's
worth looking at how stock trading
worked before computers. So, for much of
the 20th century, buying a stock meant
receiving a physical paper certificate.
It looked almost like a diploma,
complete with decorative borders,
signatures, serial numbers, and the name
of the company. If you wanted to sell
your shares, you often had to deliver
that certificate to your broker, who
would arrange for it to be transferred
to the next owner. Every trade involved
paperwork, signatures, transportation,
verification, and record-keeping. That
system worked reasonably well while
trading volumes were relatively small.
Then the stock market [music] exploded.
By the 1960s, Wall Street was processing
so many trades, it began experiencing
[music]
what became known as the paperwork
crisis. Brokerage firms were drowning in
paper certificates. Some couldn't keep
up with the paperwork. Others
temporarily closed on Wednesdays simply
to catch up with back-office processing.
Thousands of employees spent their days
moving certificates from one desk to
another, trying to determine who
actually owned what. Essentially, the
financial system had become a victim of
its own success. So, something had to
change. Instead of physically moving
millions of certificates every day,
regulators and financial institutions
created a centralized system. The
certificates would stay in one secure
place while ownership records would
simply be updated electronically
whenever shares changed hands. That
central vault eventually became the
Depository Trust Company, or DTC. And
the legal name used to hold those
shares? Cede and Co. So, today, when a
company issues shares, those
certificates usually never leave the
DTC's custody. They remain safely stored
while computers update ownership records
behind the scenes. This is why your name
doesn't appear directly on Apple's
books. Instead, ownership exists in
layers. [music]
Apple recognizes Cede and Co. as the
registered shareholder. Cede and Co.
recognizes your brokerage. Your
brokerage recognizes you. Legally, this
makes you the beneficial owner. You
receive the economic benefits of owning
the stock. If the share price rises, you
profit. [music]
If Apple pays dividends, the money flows
to your account. You have the right to
sell your shares whenever you choose,
and you can usually vote on important
corporate matters because your broker
passes those voting rights along to you.
The system sounds unnecessarily
complicated until you imagine the
alternative. Apple has roughly 15
billion shares outstanding. Millions of
people around the world own them, and
ownership changes constantly. Some days,
more than 50 million Apple shares are
traded. If Apple had to update
shareholder registers every time one
share changed hands, the administrative
burden would be enormous. Every public
company would need an army of clerks
just to keep ownership records current.
Instead, one registered owner stays on
the books while brokers maintain the
detailed records of who actually owns
each share. The arrangement also
explains why transferring investments
from one brokerage to another isn't
always instantaneous. Even though
everything appears digital, ownership
records have to move through several
institutions that all still need to
agree on exactly who owns what. The
process is highly automated today, but
it still is built on infrastructure
designed to guarantee that no share is
accidentally duplicated, lost, or
assigned to two investors at once. Some
investors choose to bypass the system
through something called direct
registration or DRS. Rather than holding
onto shares through a brokerage, they
ask to have their names entered directly
into the company's shareholder register
through its transfer agent. This makes
them the registered owner instead of the
beneficial owner. It removes one layer
of intermediaries, although it also
makes buying and selling less convenient
for many investors. For most people, the
brokerage system works remarkably well.
Trades happen in seconds, dividends
arrive automatically, and ownership
records remain accurate despite billions
of shares changing hands every week.
But, there's one final piece of this
puzzle. Your brokerage has told you that
you own the share. The records have been
updated, yet the trade itself still
hasn't officially finished. Because
after every buyer and seller shakes
hands, another institution steps in to
make sure everyone actually delivers
what they promised. Without it, the
modern stock market simply couldn't
function. So, we got to talk about
settlement. At this point, it feels like
the trade is over. Your brokerage says
you own the stock, the seller has agreed
to the price, the market maker has
matched the order, the ownership records
are ready to be updated, except none of
the money has officially changed hands
yet. This surprises a lot of people
because stock trading feels instant.
Press buy, refresh the app, and the
shares are already sitting in your
account. It creates the illusion that
everything happened in real time. In
reality, what you've been looking at is
more like a receipt than a completed
transaction. Behind the scenes, the
financial system is still making sure
both sides actually deliver what they
promised. Think about buying a house.
>> [music]
>> The buyer signs the paperwork, the
seller signs the paperwork, everyone
agrees on the price, but nobody simply
hands over the keys and hopes the money
eventually arrives. No, a third party
verifies the documents, confirms the
funds exist, checks that the ownership
can legally be transferred, and only
then completes the transaction. The
stock market does something very
similar. Every completed trade passes
through an organization called a
clearing house. In the US, the largest
one is the National Securities Clearing
Corporation, or NSCC, which is a part of
the Depository Trust and Clearing
Corporation, better known as the DTCC.
Every day, this system processes
trillions of dollars worth of securities
transactions. [music] On busy days, it
handles millions of individual trades
between brokers, banks, hedge funds,
pension funds, and market makers. Its
job sounds kind of a
Make sure every buyer gets their shares.
Make sure every seller gets their money.
But doing that safely is far more
complicated than it sounds. Imagine
there was no clearing house. Broker A
says it bought 100 shares from Broker B.
Broker B claims it never received
payment. Broker C says the shares were
already sold to someone else. Every
disagreement would have to be resolved
between individual firms, creating
thousands of separate financial
relationships. If just one large
institution failed, everyone connected
to it would suddenly face losses.
[music] So instead, the clearing house
stands in the middle of every
transaction. After your trade is
executed, the clearing house effectively
becomes the buyer to every seller and
the seller to every buyer. It guarantees
that even if one party fails, the other
side will still receive what it was
promised. This dramatically reduces risk
across the entire financial system. Now
of course, making guarantees requires
money. That's why brokers and large
financial institutions must deposit
collateral with the clearing house.
Think of it as a giant security deposit.
If trading suddenly becomes unusually
risky, the clearing house asks for more
collateral. Most of the time, nobody
notices. Then came January 2021.
Millions of retail investors began
buying shares of GameStop at an
extraordinary price. The stock
experienced enormous price swings,
sometimes moving by more than 50% in a
single day. Trading volume exploded. As
volatility increased, so did the risk
that one side of these trades might fail
before settlement. The clearing house
responded exactly as it was designed to.
It demanded significantly more
collateral from brokers handling those
trades. Some brokers suddenly needed
billions of dollars to continue
processing customer orders. Robinhood,
for example, disclosed that it received
a collateral demand of roughly $3
billion before the requirement was later
reduced. The company simply didn't have
that much excess cash immediately
available. The solution was
controversial. Robinhood temporarily
restricted customers from buying certain
highly volatile stocks while allowing
many of them to sell. To millions of
users, it looked like the market had
been manipulated. Whether people agreed
with the decision or not, the episode
exposed part of the financial system
that most investors never knew existed.
It [music] wasn't just buyers and
sellers determining whether trades could
happen. No, there was an entire layer of
infrastructure responsible for making
sure every promise in the market could
actually be [music] kept. Now, incidents
like GameStop are rare, but they reveal
why settlement exists in the first
place. Financial markets don't run on
trust, they run on verification.
Today, most stock trades in the US
settle on what's known as T+1, which
means one business day after the trade
date. Until May 2024, settlement took
two business days, known as T+2.
Advances in technology allowed
regulators and market participants to
shorten that window, reducing the amount
of capital tied up in the system, and
lowering overall risk. Many people ask
why settlement isn't instantaneous.
After all, money can be transferred
across the internet in seconds. But, the
answer is that stock trades involve much
more than moving cash. Ownership records
have to be updated. Brokers must
reconcile millions of transactions.
Market makers have to deliver correct
shares. Collateral requirements need to
be calculated. And every institution
involved has to confirm that its books
match everyone else's. Only after all of
those checks are complete, does the
trade officially settle. And by that
point, your one Apple share has
completed a remarkable journey. It
passed through your broker, a market
maker, the clearing system, the
depository, and multiple ownership
records before becoming securely
attached to your account. The technology
makes the entire process feel almost
effortless. The infrastructure behind it
is one of the most sophisticated
financial systems ever built. Behind
every stock purchase is an invisible
machine built over more than a century.
Most investors will use it their entire
lives without ever thinking about it.
But at least now you know what happens
after you hit buy. That's a wrap on this
one Eleazar. We'll see you back here
next time. Until then, take care.