What price is

After this lesson you can read a bid, an ask and a spread, and explain why a price moves at all.

The two prices

Look up any stock during market hours and there are really two prices on offer. The bid is the highest price anyone is currently willing to pay for it. The ask is the lowest price at which anyone will currently part with it. A stock might show bid 229.98, ask 230.02. The big number your app displays as "the price" is just the last trade, which happened at one of those two.

The gap between them, four cents here, is the spread. It's narrow in heavily traded stocks and can be very wide in sleepy ones. It matters to you personally, because an ordinary round trip buys from the ask and later sells to the bid, so the spread is part of what the trip costs you. Course 9 counts those costs properly.

The order book

Behind the bid and ask stands a queue. Here's a tiny slice of one:

This is the order book: everyone's resting orders (course 10 explains the order types), stacked by price. Now watch a price move. Someone wants 700 shares right now and sends a buy at the market. The first 400 fill at 230.02 and that level is gone; the next 300 fill at 230.06. The last trade is now 230.06, the lowest remaining offer is 230.06, and the price "went up."

That's really the whole of it. Price rises when buyers are impatient enough to walk up the sellers' queue, and it falls the same way in reverse, with sellers working down through the bids. The candles you'll be reading in School III are summaries of this process repeating, a few minutes or a day at a time.

"Why is it up today?"

Financial news answers that question every day with a story: up on earnings optimism, down on rate fears, that kind of thing. Some of those stories are right. Mechanically, though, the answer is always the same one: it's up because today the people who wanted to buy were more urgent than the people who wanted to sell. The story is a guess about why they were urgent, written after the fact. Getting comfortable with that distinction now will save you from a whole family of mistakes later, and School VIII makes the case with numbers.

Related, and worth planting early: a company has a business, and you can form an opinion about what that business is worth. Professional investors do it for a living and disagree with each other constantly. All the market ever publishes is trades. So when someone says "the market is wrong about this stock," what they mean is that their own opinion of value differs from the current price. Traders have been saying it for as long as there have been prices.

Check yourself

1. Bid 45.10, ask 45.16. You buy at the market and immediately sell at the market. Where do you trade, and what did the round trip cost per share? (Buy at 45.16, sell at 45.10. The round trip cost six cents, which is the spread.)
2. Using the book above: a market sell of 1,000 shares arrives. Walk it through. (600 fill at 229.98, the next 400 at 229.95. The last price is now 229.95, and the best bid is 229.95 with 400 shares left.)
3. A stock closes up 3% on no news. What definitely happened, and what possibly happened? (Definitely: buyers were more urgent than sellers today. Possibly: any of the stories.)

The idea this lesson installs

Price moves because someone got impatient.

Next: Course 3 — "The players and what they actually do."