How Market Prices Move Through Buying and Selling

Most people know that market prices move due to buying and selling activities, but not many understand exactly how market prices move. It can be confusing at first glance, as every trade in the market requires a buyer and a seller.

Bid-Ask Spread

Whether the market is for stocks, foreign currencies, futures, or options, every market consists of two prices: the bid price and the ask price. The bid price is also referred to as the ask price.

The bid price is the highest price a buyer is willing to pay for a purchase order. The ask price is the lowest price a seller is willing to accept for a sell order. The difference between these two prices is called the “bid-ask spread.”

If the bid and ask prices match, a trade occurs. Those orders then disappear from the market, and other bids and asks that have not yet matched remain.

There are offers at multiple prices, and people place bids at various sizes and prices at each of those prices. The same goes for the asks. For most actively traded stocks, there is usually a bid slightly lower than the current ask.

For each bid, there is another ask at a slightly higher price, as different individuals want to buy or sell at specific prices. All these bids and asks at different sizes and prices are part of the order book in the market.

At any given time, a trader can choose to buy at the ask price or sell at the bid price. This will create an instant trade. A trader can also decide to place a bid or ask at any price they wish, but there is no guarantee that another trader will fulfill that order.

Price Movement

Suppose someone is selling 200 shares at $90.22. If someone buys those shares at $90.22, a trade occurs, and those shares become unavailable. The next bid may be to sell 100 shares at $90.24.

If someone buys those 100 shares, or if the seller cancels their order, that order disappears, and the bid moves to the next available price that someone is selling at, say $90.25. The purchase was sufficient to remove all available shares up to $90.95. This is how prices move.

The same thing happens on the bid side. If someone sells 200 shares to a person willing to buy 200 shares at $90.21, the bid at $90.21 disappears. If the next bid is for 300 shares at $90.20, and someone sells 300 shares (or more) at $90.20, that bid will disappear, and the bid will be the lowest bid. When a sell order comes to the market larger than the number of shares available at the current bid, the bid price will drop because the sale absorbs all those shares at the current bid.

When a buy order comes to the market larger than the number of shares available at the current ask, the ask price rises, because the purchase absorbs all those shares at the current ask.

Market Speed

Transactions can occur at a rapid pace. People place bids and asks at different prices and quantities, and they can cancel or change those orders at any time, causing fluctuations in supply and demand. Other traders do not place bids or asks but trade based on the currently available bids and asks.

When transactions occur at the ask, it is referred to as “buy volume,” and when transactions occur at the bid, it is called “sell volume.” Prices can move quickly or slowly, depending on how willing buyers and sellers are to move. Prices can shift very rapidly if someone places a large buy/sell order in the market. The order buys or sells every share, regardless of price, until it is filled.

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Removing such orders eliminates all nearby offers or requests, resulting in a drastic and immediate price change. At other times, prices move slowly because there are few transactions, or there are many shares available at each offer or request, making it very difficult to move the price, even with numerous transactions occurring.

Frequently Asked Questions

Why do stock prices change after trading hours?

Not all trading occurs during regular trading hours. Some brokers offer after-hours trading sessions where trading is limited. Prices move during after-hours trading sessions in the same way they do during trading hours – based on supply and demand, which are influenced by various factors affecting stock prices throughout the day.

What factors influence stock prices?

Many factors influence people’s decisions to buy and sell stocks, thus affecting the rise or fall in prices. The company’s earnings or the price-to-earnings ratio (P/E ratio) for each company plays a significant role. Investors’ beliefs about a particular market sector or the company’s potential can affect trading activity. Major news about the company – such as a supply chain disruption – can also significantly impact prices.

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Source: https://www.thebalancemoney.com/how-market-prices-move-through-buying-and-selling-1031049