How markets work
A stock market is essentially a giant, continuous auction, buyers say what they're willing to pay, sellers say what they're willing to accept, and a trade happens whenever those two prices meet. Exchanges (like the NYSE or NASDAQ) provide the infrastructure that matches these orders in fractions of a second, for millions of participants at once. Nobody sets the price directly, it emerges purely from the balance of what buyers and sellers are actually willing to do at that moment.
A worked example
If a stock is trading at $100 and suddenly a lot more people want to buy it than sell it (more demand than supply), buyers start offering higher prices to get sellers to part with their shares, the price rises. If the opposite happens and more people want to sell than buy, sellers start accepting lower prices just to find a buyer, the price falls. This happens continuously, all day, across thousands of stocks at once.
Key takeaways
- Prices are set by real-time supply and demand, not by any single authority.
- A trade only happens when a buyer's price and a seller's price actually meet.
- Markets operate on set hours (e.g. 9:30am–4pm US Eastern for US exchanges), prices can gap up or down overnight when markets reopen.
Common mistakes
- Thinking a stock's price is "decided" by the company itself, it's decided by the market.
- Not realizing prices can move significantly outside normal trading hours on big news.
- Assuming a stock is "cheap" just because its dollar price looks low, without considering the size of the company.
Test yourself
1. What actually determines a stock's price?
- The company's CEO sets it directly
- Real-time supply and demand between buyers and sellers
- A government committee
- It never changes once set
Answer: Real-time supply and demand between buyers and sellers. Prices emerge purely from what buyers and sellers are actually willing to trade at, updated continuously.
2. What happens when more people want to buy a stock than sell it?
- The price falls
- The price tends to rise
- Trading stops completely
- Nothing happens
Answer: The price tends to rise. More buying pressure than selling pressure tends to push the price up as buyers compete for available shares.
3. Can stock prices move outside normal trading hours?
- No, never
- Yes, especially on major news, causing a gap when the market reopens
- Only on weekends
- Only for ETFs
Answer: Yes, especially on major news, causing a gap when the market reopens. Significant news after hours can cause a stock to open noticeably higher or lower than where it closed.
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Sources and further reading
- Investor.gov (U.S. SEC): Introduction to Investing
- Investor.gov: Glossary of investing terms
- FINRA: Investing basics for individuals