Why Stock Prices Move: Supply and Demand

Pull up any stock right now and stare at the price. Blink. It's different. Nobody announced that. No committee voted.

So who actually changed it? There's got to be someone typing a new number somewhere.

There isn't. The price is just the last thing two people agreed on. That's it. And by the time you've read it, someone else has agreed on something else.

Okay, but that feels too loose. A whole company's value is... whatever the last two people said?

The last two WILLING people, yes. So let's build it from the bottom. Start with what's actually sitting in the market waiting for you. Picture a ladder of orders. People who want to buy a share post the price they'd pay. People who want to sell post the price they'd take. That's the order book.

And the buyers always want to pay less than the sellers want, obviously.

Always. So there's a gap in the middle. Best buy price, say ninety-nine ninety-eight. Best sell price, a hundred dollars. That gap is the bid-ask spread.

So what's the price of the stock then? It's two numbers.

Right, and that's the thing people get wrong. There's no single price sitting there. There's a price to buy right now, and a lower price to sell right now, and nothing in between until someone trades.

Huh. So the spread is basically what it costs me to be impatient.

That's exactly what it is. The cost of immediacy. If you're willing to wait and post your own price, you don't pay it. If you want it done this second, you cross the gap.

Fine. But that still doesn't move the price. Me buying one share at a hundred doesn't change anything.

It doesn't. But now make the order bigger. Say there are two hundred shares offered at a hundred dollars, and then the next sellers up the ladder want a hundred and five, then a hundred and ten.

And if I want a thousand shares...

You eat the two hundred at a hundred, then you climb. You pay more for every chunk. That's called walking the book, and your average price is worse than the number you saw on screen.

So the act of buying is what pushed it up. I moved the price by wanting it.

You did. That's market impact, and it's the real reason big funds break orders into pieces. Although that has its own problem.

Which is what, people notice?

People notice. A stream of buying is a signal. Others jump on the trend, and the price runs away from you before you've finished. Selling works the same in reverse.

Okay, so who's standing there taking the other side of all this? Someone has to be selling me those shares at eight in the morning.

Market makers. Their whole job is to always be quoting both sides. They'll buy from you at ninety-nine ninety-eight and sell to you at a hundred, and keep the two cents.

Two cents. That's... a terrible business?

Thousands of times a day it isn't. But they're carrying real risk. The NYSE's own paper on market making walks through it. Say they buy two hundred shares off you at a hundred dollars, and then the price drops.

Then they're holding something that's worth less than they paid.

And they have to decide. Hold it and hope it reverses, or sell to the best buyer out there and lock in a loss. The spread is the compensation for sitting in that seat.

So when things get scary, I'm guessing they just... quote wider.

They do. The spread widens, and that's the market getting more expensive to trade exactly when you most want out.

Which explains a crash better than I expected, actually.

Now put news into it. A drug company gets approval. Everyone's estimate of what the shares are worth jumps at once.

But nothing physical happened to the company in that second. No pills got sold.

Nothing. What changed is expectations. Buyers rip through the sell orders sitting on the ladder, and the market makers pull their old quotes and repost higher, because quoting yesterday's price into today's news is how you get run over.

So it's not that billions moved. It's that the number everyone's using got rewritten.

And that's price discovery. Thousands of people with different information, different time horizons, arguing through their orders, and the price is the running score.

Does it ever get it right?

Roughly. The honest version is prices are wrong constantly, just not predictably wrong in a direction you can trade on. And macro news does real work. A Federal Reserve paper found macro surprises explain about a third of quarterly swings in the S and P five hundred.

Only a third. So two thirds is... everything else.

Everybody's guesses, needs and panics. Try this. Thin little stock, best buy price ten dollars, best sell ten-fifty. You want five thousand shares, right now, at market. What happens?

I pay ten-fifty for whatever's there, then I climb the ladder for the rest. So my average is above ten-fifty. And the price on screen afterwards is higher than when I started.

And the spread?

Wider? Because I just cleared out the sellers near the top.

Wider, yes, until new orders come in to fill the gap. You've paid the spread, paid the impact, and told everyone watching that someone wants this stock.

For a small investor that's weirdly comforting. I'm too small to matter.

You are, and that's your advantage. So: the price is the last agreed trade. The spread is what impatience costs. Big orders move prices by consuming the ladder. Market makers sit in the middle and get paid for the risk. And news moves prices by moving expectations, not anything physical.

What do I actually look at tomorrow?

The spread. Big familiar company, it's a penny. Something tiny and barely traded, it's enormous. That gap tells you how many people are really there.

Right. I've definitely bought things without looking at that.