When you see the price of a stock on stock market, it’s not the price you can buy at.
it’s the price the stock was last traded it
there are two ways to trade on stock market
- set a price : This tells the software not to buy above the specified price or not to sell below it. this is called a Limit Order
- buy/sell at the best price algorithm gets. This is called a Market Order
whenever you place a buy or sell order you specify the amount and type of order. then your order is added to a list. but wait which list?
Buy List
Sell List
there are two things to note in the above tables
- the sell list is sorted in ascending order and the buy list is sorted in descending order
- only the limit orders are there in this list not Market order
- let’s consider all the prices are for the same stock for simplicity
now moving on to how trades are done and prices are set
suppose there is a market order to buy 1200 quantities, so first the algorithm will buy 101.25 400 quantities and then 101.30 at 600 quantities and then 200 quantities of 101.35. and the price of the stock will no be the last trade price which is 101.35
now you know why when someone buys a stock it moves the stock price up
if this had been a limit trade at 101.31, we could not have completed the order so 1000 units would have been bought and remaining 200 would be added to the buy list
so the price of stock would be 101.30
so this was it for today’s blog subscribe for more “How things really work blog”