How Market Prices Move Through Buying and Selling

How buyers and seller cause price changes

traders buying and selling on exchange floor
Traders move markets through buying and selling. Jonathan Kim/Getty Images

Most people are aware that market prices move because of buying and selling, but not many people actually understand how buying and selling moves market prices. And it can be a bit confusing at first glance, since every market transaction requires that there always be a buyer and a seller.

An explanation of how market prices move is composed of two parts. First, it's important to understand that there are always two prices in a market--a bid price and an ask price.

Then next step is recognizing at which of these prices orders are being processed, as that will ultimately move the price, as described below. 

Part 1 - The Bid-Ask Spread

Every market, whether it is the stock, forex, futures or options market has two prices--a bid price and an ask (offer) price

The bid price is the higher advertised price a buyer is posting an order to buy at. The offer price is the lowest advertised price a seller is posting an order to sell at. The difference between these two price is called the bid-ask spread. The bid and ask prices always exist, because if the bid and ask are the same, a trade occurs (a buyer and seller agree on the price), those orders disappear from the market leaving the other bids and offers that haven't been matched yet. 

There are bids are multiple prices, and people bidding different amounts of shares (in the stock market, or contracts or lots in other markets) at each of those prices.

The same goes for the offers. The attached chart shows a sample of what the bids and offers may look like. For most actively traded stocks, there is a bid, and then another bid below it at a slightly lower price. And for each offer, there is another offer at a slightly higher price. This is because different people only want to buy or sell at certain prices.

All these bid and offers of various size and price are part of the market's order book.

At any given time though a trader can choose to buy at the ask price, or sell to the bid price. This will create an instant transaction.

Part 2 - Buying and Selling Volume at the Ask or Bid

On the graphic of the sample order book, someone is selling 201 shares at 90.22. If someone buys those 201 shares at 90.22 a transaction occurs and those 201 shares are no longer available. The next shares available (100) are at 90.24. If someone buys those 100 shares (or the seller cancels their order) then that order disappears and the offer price is now 90.25. The buying was great enough that it removed all the shares available from 90.22 up to 90.95. That is how prices move.

The same thing could happen on the bid. If someone sells 200 shares to the person willing to buy 200 shares at 90.21, then the bid at 90.21 disappears and the new bid is 90.20. If someone sells 272 shares (or more) at 90.20, then that bid will disappear and the bid below it will be the new highest bid. 

Transactions can occur at a furious pace. People are biding and offering at different prices, and in different quantities, and they can cancel or change those orders at any time, causing the bid and ask to change.

Other traders aren't posting bid or offers, but are rather simply transacting at the prices currently available (selling to the bid, or buying at the ask).

When a sell order comes into the market that is bigger than the number shares available at the current bid, then the bid price will drop, because all those shares at the current bid will absorbed by the selling. When a buy order comes into the market that is bigger than the number of shares available at the current offer, then offer price will move up, because all those shares at the current offer are absorbed by the buying. 

Price can move quickly or slowly, depending on how aggressive the buyers and sellers are. The price can move very quickly is someone puts out a big market buy/sell order (meaning the order will buy/sell every share, no matter the price, until the order is filled).

Such orders can instantly remove all nearby bids or offers, causing the price to change drastically. Other times the price moves slowly, because there are few transactions, or there are so many shares available at the current bid or offer that it is very hard to move the price even with lots of transactions going through. 

Final Word on How Prices Move

There are always two prices in a market--the bid and the ask. When you trade you can post a bid or an offer, and then wait for a seller or buyer to transact with your order. Alternatively, you can buy from the offer or sell to the bid, creating a transaction instantly. It is these two types of actions that create price movement in the market. There are only so many shares being bid and offered at various prices, and when those shares are removed by an opposing order (buyer meets seller or vice versa) then the bid and offer may change. As the bid and offer change, transactions will occur a different price prices, reflective of the changes in the bid and ask.