Every night in the news, you might hear that a stock price of a company went up by some percentage. On the next day, it could be down by different amount of percentage. But forget stock market, you can go to local flee market or traditional market, you can observed the price of a good can go up and down over time, even in a few minutes.

Market Model

So what really move the price up and down ? Of course, remember from school: SUPPLY and DEMAND

Supply & Demand Graph (Source: wikipedia)

This basic economics rule is easy to understand. Let pretend you are selling oranges and no one else is selling oranges in this area. You start selling the oranges for $2 a kilogram and you have only 50kg. Suddenly a flock of people standing in front your shop and they all want to buy your orange.

One people say: “I’ll buy all of your orange: it’s 50 kg right? Here’s $100″

Before you say anything, 2nd person talk to you: “I’ll give you $110 for all of them”. Then the 3rd person say: “No, I buy it for $120.” You said, I’ll sell it for $150. The 2nd person take it.

This is a representation of “increasing demand”, if demand increases and supply stays, then the price will go up. In other word: if there is more buyer than seller, the price will go up.

The next day, knowing that oranges are really popular in the area, 5 other people start selling oranges as well, all of the oranges seller put a price $3 a kg.

Then a person come to buy 50kg of oranges. “I want to buy 50kg of oranges. How much?”
You said “$150, please…”

But before that person reply, the oranges seller from cross the street shout “Sir, I’ll give you only $140 for 50kg, come here…” Then the 3rd seller yell “I sell it for $120″. And finally you said “I sell it to you for $80, give me your money”

This is a representation of “increasing supply”, if supply increases but demand stays, then the price will go down. In other word: if there is more seller than buyer, the price will go down.

Bid Price and Ask Price

In the stock exchange, although the mechanism is still the same as illustrated above, the price in the market will go up and down with the mechanism of Bid Price and Ask Price.

By nature, buyer will want to buy as cheap as possible. Buyer will put their price to buy and called “Bid Price” . Seller will want to sell as high as possible. They put their selling price in the market which is called “Ask Price“. (Also known a6s “Offer Price”) The different between Ask Price and Bid Price is known as “Spread”

For example, let say person “A” want to buy Microsoft stock for $20. Person “B” wants to sell his stock for $25. The spread is $5.

then person “C” come and also want to sell his stock. “C” can see that in order for him to sell his stock he need to sell for less than $25 (otherwise someone will buy from B) And the condition can be seen as: (The spread is now $4.5)

How about there are 3 more seller wants to sell their stock:

Now everybody can see that there are too many seller and the seller will compete each other to make sure they can sell their stock. After a while the price can be like:

Until certain time that one of the seller (say person “E”)  will “give up” and put $20 as their bid price. That’s when the price is now change to $20 from previous. Now that the price has gone to $20, a lot of other people will see it as opportunity to buy. Let see what happened if there are 5 more buyer:

Now, the seller can see that more buyer has come and they n\know they can increase their ask price

Now the buyer realize that they need to compete each other in order to get this stock and they start to increase their bid price:

Until finally one of the buyer (“H”) say, “Okay, I’ll buy it at $21.5″ And the price of the stock will become $21.5 and the bid-ask situation become:

And so on …. The picture of condition of Seller and Buyer with their corresponding Ask Price and Bid Price (as illustrated with table above) is what so called “Market Breadth”

Conclusion

So, remember

If there is more seller, the price will go down

If there is more buyer, the price will go up

Denis Kristanda