Click image to open full size
How the Stock Market Actually Moves
Supply, demand, news, and market makers
Related Tools
Related Worksheets
A stock price moves when buyers and sellers disagree about what a share is worth and new trades happen at updated prices. The market is not a single person setting prices, but a network of investors, funds, algorithms, brokers, and market makers reacting to information. Prices can jump in seconds because many orders are constantly arriving, canceling, and competing. Understanding this helps students see why news, expectations, and liquidity matter as much as the company itself.
At any moment, the best bid is the highest price someone is willing to pay, and the best ask is the lowest price someone is willing to accept. A trade occurs when a buy order meets a sell order, and the reported stock price usually reflects the most recent trade. Earnings reports, interest rate changes, economic data, and investor emotion can shift the demand curve for shares or the supply of shares offered for sale. Market makers help keep trading active by posting both bids and asks, earning the bid-ask spread while taking on short-term inventory risk.
Key Facts
- Stock price = price of the most recent completed trade.
- Best bid = highest current buy offer; best ask = lowest current sell offer.
- Bid-ask spread = ask price - bid price.
- A market order buys at the best available ask or sells at the best available bid.
- Expected return ≈ dividend yield + expected price growth.
- Higher interest rates often lower stock valuations because future profits are discounted more heavily.
Vocabulary
- Share
- A share is a small ownership claim on a company that can be bought or sold in the stock market.
- Bid
- The bid is the highest price a buyer is currently willing to pay for a stock.
- Ask
- The ask is the lowest price a seller is currently willing to accept for a stock.
- Market maker
- A market maker is a firm or trader that posts buy and sell prices to help keep trading continuous.
- Liquidity
- Liquidity is how easily an asset can be bought or sold quickly without causing a large price change.
Common Mistakes to Avoid
- Thinking the stock price is what the company is truly worth at all times. The price is only the latest trade and can move away from long-term value when news, fear, or excitement changes order flow.
- Confusing a market order with a limit order. A market order prioritizes speed and may fill at a worse price, while a limit order controls price but may not fill.
- Ignoring the bid-ask spread. The spread is a real trading cost because buyers usually pay the ask and sellers usually receive the bid.
- Assuming good company news always makes the stock rise. If investors already expected even better news, the price can fall when the actual result disappoints expectations.
Practice Questions
- 1 A stock has a best bid of 50.05. What is the bid-ask spread, and what price would a small market buy order most likely pay?
- 2 You buy 20 shares at an ask price of 19.10. Ignoring fees and taxes, what is your dollar profit?
- 3 A company reports higher earnings than last year, but its stock price drops right after the announcement. Explain how expectations and order flow can make this happen.