How markets work

A market is a place where people who want to buy meet people who want to sell. Price is simply the last level where they agreed.

The two prices

At any moment there are two prices, not one:

• Bid — the highest price someone is currently willing to pay.
• Ask (offer) — the lowest price someone is currently willing to sell at.

The gap between them is the spread. Buy with a market order and you pay the ask; sell with a market order and you hit the bid.

Why price moves

Price moves when one side is more eager than the other.

• If buyers keep paying the ask until nobody is left selling at that price, the ask moves up — price rises.
• If sellers keep hitting the bid until nobody is left buying at that price, the bid moves down — price falls.

Price looks for business

Markets move to find levels where lots of trading can happen. When price reaches a new level and trade picks up, the market tends to stay. When trade dries up, it tends to leave. This is the core of auction market theory, which has its own track later.

Who is on the other side?

• Market makers — quote both a bid and an ask all day, earning the spread.
• Institutions — funds and banks moving big positions slowly.
• Short-term traders — scalpers and day traders, including you.
• Hedgers — reducing risk elsewhere, often not caring much about price.

Quick recap

1. There's a bid and an ask; the spread is the gap.
2. Price moves when one side is more aggressive.
3. Markets move to find where business gets done.