How Are Stock Prices Made?

Every app, ticker and news channel shows numbers like “Apple $228.40”. But who decided on that number? The answer is surprisingly simple – and at the same time the key to almost everything that happens in markets: nobody. A stock price isn’t a tag someone sticks on a share. It is the result of thousands of decisions colliding every second.

A price is a meeting point#

Imagine a farmers’ market selling just one thing: apples. Some people want to buy apples, each with a maximum price in mind. Others want to sell, each with a minimum. A deal only happens when a buyer is willing to pay at least what a seller asks.

That is exactly how an exchange works. A stock price is the price at which a buyer and a seller last met. When you read “Apple $228.40”, it means: a moment ago, somebody bought a share of Apple for $228.40 – and somebody else sold it for exactly that.

The order book: everyone’s wishes at a glance#

So that buyers and sellers can find each other, an exchange collects all open orders in an order book, one for each stock. On one side are the buy orders, sorted from the highest price down. On the other, the sell orders, sorted from the lowest price up.

Two prices matter most:

• The bid is the highest price a buyer is currently offering. If you want to sell right now, that’s what you get.
• The ask (or offer) is the lowest price a seller is currently asking. If you want to buy right now, that’s what you pay.

The spread – the invisible fee#

The ask is always above the bid – otherwise the two orders would already have been matched. The difference is the spread. If you buy a stock and immediately sell it again, you lose exactly that spread, even though the price hasn’t moved.

For large, heavily traded stocks the spread is tiny: often a single cent, less than 0.05% of the price. For small companies, obscure bonds or outside regular trading hours, it can be one percent or more. How easily something can be traded without a price concession is called liquidity.

How an order is executed#

What happens when you place an order? That depends on the order type. The two most important:

The market order says: fill me now, at the best available price. A market buy order takes the cheapest offer on the ask side. If there aren’t enough shares there, it moves on to the next price level – and so on.

The limit order says: buy only if the price is at most X (or sell only at X or higher). If your limit doesn’t reach the existing orders on the other side, your order isn’t filled but added to the order book – where it waits for a counterparty.

Try it yourself. Buy with a large market order and watch it “eat” through several price levels:

If you buy 1,500 shares at market, the 300 shares at $100.10 aren’t enough. The order takes them all, then the 500 at $100.20, then 700 of the 800 at $100.30. Your average price is about $100.23 and the last price jumps to $100.30. This effect is called market impact or slippage: large orders move the price against themselves.

Price-time priority#

What if several buyers bid the same price? Exchanges use price-time priority: the better price goes first, and at the same price, the order that arrived earlier. A buyer with a higher limit stands further up the queue.

The auction: one price for everyone#

Besides continuous trading, where every matching order fills immediately, there are auctions. The NYSE and Nasdaq open and close each day with an auction; most European exchanges do the same. For a few minutes the exchange collects orders without executing them, then calculates the single price at which the largest number of shares can trade.

This is the classic picture from economics class – and on exchanges it is calculated for real every day. The closing auction sets the official closing price that many funds and indices use.

Who makes sure someone is always there?#

For popular stocks, there are buyers and sellers at almost every moment. For smaller ones the order book would often be empty. That’s where market makers come in: banks or specialist trading firms that continuously quote both a bid and an ask. They earn the spread and in return make sure you can trade whenever you want.

Many commission-free brokers route your orders to a small number of such firms rather than directly to an exchange, and get paid for doing so. We cover this payment for order flow in the market microstructure lesson of the professional module.

Why prices move at all#

If a price is just a meeting point – why does it constantly shift? Because the willingness of participants to buy or sell at certain prices changes. And that depends on expectations:

• A company reports better profits than expected. Many now think the stock is worth more. Buyers raise their bids, sellers ask for more – the price rises.
• The central bank unexpectedly raises interest rates. Bonds become more attractive, stocks relatively less. Some investors sell – the price falls.
• A large fund has to unwind a position. It sells big blocks over several days and pushes the price down, even though nothing about the company has changed.

Summary#

A stock price is not a fixed value but a snapshot: the last point at which supply and demand met. Behind every number on the screen is an order book full of wishes, a spread as a small hurdle and a crowd of people and machines translating their expectations into orders. Understanding this explains why prices sometimes jump, why large orders can be costly and why a limit order is often the smarter choice.

Next we look at where all this happens: which exchanges exist, when they are open and what happens after you click “buy”.