Bids, Asks, and Current Stock Prices
To understand what makes stocks and shares price move you must first understand a few things about the current pricing of a stock. At any given time during regular trading hours a stock has 3 values associated with it. A bid, an ask, and a current price.
The bid is the highest amount someone is currently willing to pay for a share of stock, while the ask is the lowest amount someone is currently willing to accept for a share of stock. Each number will usually be shown next to the number of shares the investor is offering or asking for. The price of a stock at any given time is simply the last price a share of that stock sold for. Usually the bid and the ask are relatively close to the current share price. The difference between the bid and the ask is called the spread and it is usually healthier for a stock to have a smaller spread. To learn more about bidding and asking see the stock order types page.
Supply and Demand with Stocks and Shares
If you have ever taken a beginners economics course you probably remember learning about supply and demand. The concept is quite simple. If there is a larger supply of a product than there is demand, the price will likely drop. If there is a greater demand and not enough supply to match, than the price will probably rise. This is also true with stocks and shares.
As was explained in lesson 1, the stock market is a literal market where a product, namely ownership of a company, is bought and sold. This means it runs on similar economic principles. If there are a lot of investors trying to sell a stock, and a much smaller number of investors looking to buy that same stock, the price will of the stock will begin dropping.
Let’s look closer at the reasoning behind the price drop by creating a mini-market with five people; John, Jessica, Jeremy, Janet, and Jimmy. We will pretend that all five of these investors own 100 shares of stock in Company A. One day they find out that Company A messed up on a new product and it will be delayed for a year. Four of them decide to sell their shares in the company and put them up for sale. Unfortunately, due to the news, there is only one stock trader that is interested in buying the stock for its current price. John sells his shares, but that leaves Jessica, Jeremy, and Janet, all with shares they still would like to sell. There is nobody willing to buy at the current price, but one investor has offered to buy at a price $1 lower than the current price. Jessica sells to the investor, and the current stock price adjusts to show a current worth that is $1 less than before. If Jeremy and Janet decide to sell as well, they may push the current price even lower as they seek to find investors to purchase their shares of stock. Sometimes when a company announces extremely bad news you can see the worth of a single share of stock drop more than 50% in a single day.
Because price is based on supply and demand of shares, the current share price of a company does not often reflect the actual current value of that company. This means that the price of a stock can be manipulated if a person or institution has enough money. Let’s dive deeper.
Let’s say a large hedge fund owns 1 million shares of Company A. The average volume (how many shares are sold per day) of this company is about 5 million shares. The hedge fund decides that it wants to push down the price of a stock for a number of reasons. They can flood the market instantly with 100,000 shares of that stock. Now there are enough orders waiting at the current market price for about 10,000 of their shares. That still leaves 90,000 shares though. Now the investors that have a purchase order at a price slightly lower than the current price get their orders filled. There is still 80,000 shares selling though. There is another group that has put in buy orders for shares of the stock if it ever drops $5. Well there are 80,000 shares for sell and everyone that is offering to buy at the current price or slightly below has bought. This means that group that has cheap buy orders get these filled. Now the price of the stock has dropped by $5. Has the actual value of the company, or anything changed with the company at all? The answer is no. There was simply an oversupply of shares of stock and that means that the price dropped.