MEPX
Chapter 3 of 12All chapters
  1. 1What a share is
  2. 2Exchanges and brokers
  3. 3How a price is set
  4. 4Order types
  5. 5What it costs
  6. 6Reading a company
  7. 7Dividends and returns
  8. 8Indexes and funds
  9. 9Risk and diversification
  10. 10Market cycles
  11. 11Psychology and mistakes
  12. 12Learning further

Chapter 3 of 12

How a price is set

The order book, bid and ask.

Buyers and sellers on a list

At any moment there are people willing to buy at various prices and people willing to sell. The highest buy offer is the bid, the lowest sell offer is the ask, and a trade happens when they meet.

  • The gap between them is the spread, and it is a real cost of trading.
  • The last traded price is history. The bid and ask are what you can actually get.

Liquidity

A liquid stock has many orders close together, so a spread is small and a large order barely moves the price. A thin one can move sharply on a single trade, which cuts both ways.