What causes a stock's price to change?

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Stock Market Question.

There is something very basic and fundamental about how the stock market works that I have never understood and always wondered about.

I understand that a company issues a certain fixed number of shares so the value of those shares are subject to the law of supply and demand. However, it seems like, at any given moment I, and anyone else, can buy or sell any number of shares at the current stock price. So what is the actual mechanism that determines the change in stock price?

If I look at the stock price of company X and see it is selling for $100 per share I, and anyone else, can decide to buy one share at the market price of $100, or one million shares at the market price of $100. So what actually makes the stock price of company X actually move up to $100.01 per share or down to $99.99 per share? It doesn't seem like the stock price would move up unless all available shares were already purchased, or down unless there were people willing to sell shares for less than the market asking price at any given moment.


The answer is that stock prices are indeed determined by supply and demand. If you see no change in price when you trade, it is because the amounts you are trading are relatively small. If you try to buy or sell a particularly large amount at one time you will indeed see the price move. This is called the “market impact” of your trade. E.g., if you buy a lot the price will rise, at least temporarily. The “flash crash” of a few years ago was caused by a particularly large sell order which was entered by mistake.

In practice, traders place limit orders to buy below the market price, and to sell above it. If there is not enough available at the current market price, the price moves up or down enough to trigger these limit orders. The set of limit orders to buy can be thought of as a demand curve, and the limit orders to sell function as a supply curve.

Answered by:
Dr. David Frankel
Associate Professor