Why prices move

The price is the last trade

When you look up a share and see “$50.00”, that number is not set by the company or by the stock exchange. It is the price of the most recent trade: the last time someone who wanted to buy and someone who wanted to sell agreed.

A moment later, two other people may agree on $50.01 or $49.99, and that becomes the price. A busy share can trade many times a second, which is why its price never seems to stand still.

Buyers, sellers and the order book

Everyone who wants to trade sends an order through their broker to the exchange. A buyer says how many shares they want and the most they will pay. A seller says how many they have and the least they will accept.

The exchange keeps these waiting orders in a list for each share, called the order book. Buyers’ orders sit on one side, sorted from the highest price down. Sellers’ orders sit on the other, sorted from the lowest price up.

• The highest price any buyer is offering right now is the bid.
• The lowest price any seller will accept right now is the ask.
• The gap between the two is the spread.

As long as the best buyer offers less than the best seller asks, nothing trades. A trade happens only when someone accepts the other side’s price — a buyer pays the ask, or a seller takes the bid.

Two ways to send an order

A market order says: buy (or sell) now, at whatever price is waiting. It is filled at once, starting with the best price on the other side. If your order is larger than the shares offered at that price, the rest is filled at the next price, and the next.

A limit order says: buy only at this price or lower (or sell only at this price or higher). It protects you from paying more than you meant to, but it may never be filled if the price does not come to you. Until it fills, it waits in the order book with everyone else’s.

Why the price moves

The price moves when one side is more eager than the other. If more people want to buy than to sell at today’s price, buyers start paying the ask, the cheapest sellers are used up, and each new trade happens a little higher. If sellers are the eager ones, they keep accepting the bid, and the price steps down.

Behind that eagerness is one question: what will this company earn in the future, and what is that worth today? Nobody knows the answer, so every buyer and seller is acting on a guess. The price is, roughly, where those guesses meet.

That is why news moves prices — and why it sometimes moves them the “wrong” way. A price already reflects what people expect. When news changes those expectations, the price moves:

• A company reports a record profit, but investors had expected more. The price can fall.
• A company reports a loss, but a smaller one than feared. The price can rise.
• Nothing about the company changes, but interest rates rise, or a whole industry falls out of favour. The price can move anyway.

How much a price moves around is called its volatility. Some shares move a few tenths of a percent on a normal day; others move several percent.

Liquidity: how easily a share trades

A share that many people trade all day has a deep order book: many orders, close to the last price, on both sides. The spread is often a cent or two, and a normal-sized order barely moves the price. Such a share has high liquidity.

A share that few people trade has a thin order book. The spread can be wide, and a single large order can use up the waiting orders and push the price a long way. Buying it and then selling it straight away can cost you the whole spread, before any fee.

In short

The price on your screen is the last trade between a buyer and a seller. Waiting orders form the order book; the best buyer’s price is the bid, the best seller’s the ask, and the gap is the spread. Prices move when one side is more eager than the other — usually because the news changed what people expect the company to earn.