What is the Market Price?

The market price is the current price at which an asset or service can be bought or sold. The economic theory contends that the market price converges at a point where the forces of supply and demand meet. Shocks to either the supply side or demand side can cause the market price for a good or service to be re-evaluated and change. It is important to calculating consumer and economic surplus.

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Understanding Market Price

Understanding Market Price

The market price of a security is the most recent price at which the security was traded. It is the result of traders, investors, and dealers interacting with each other in a market.

To comprehend how a market price is derived, it is important to understand some basic trading concepts. In order for a trade to occur, there must be a buyer and a seller that meet at the same price. Bids are represented by buyers, and offers are represented by sellers. The bid is the higher price someone is advertising they will buy at, while the offer is the lowest price someone is advertising they will sell at. For a stock, this may be $50.51 and $50.52.

If the buyers no longer think that is a good price, they may drop their bid to $50.25. The sellers may agree or they may not. Someone may drop their offer to a lower price, or it may stay where it is.

A trade only occurs if a seller interacts with the bid price, or a buyer interacts with the offer price.

Bids and offers are constantly changing as the buyers and sellers change their minds about which price to buy or sell at. Also, as sellers sell to the bids, the price will drop, or as buyers buy from the offer the price will rise.

Key Takeaways

  • The market price is the current price at which a good or service can be purchased or sold.
  • In financial markets, the market price can change quickly as people change their bid or offer prices, or as sellers hit the bid or buyers hit the offer.
  • The bid and offer prices represent where an asset can be bought or sold right now.

Market Price in Other Areas

In securities trading, the market price is the current price as dictated by the last recorded trade. This may vary from the current bid and offer. The market price in the bond market is the last reported price excluding accrued interest; this is called the clean price

The market price for goods and services is the current price it can be bought or sold for.

Example of Market Price and Changes

The interaction between buyers and sellers is what changes the market price. For example, assume that Bank of America Corp (BAC) has a $30 bid and a $30.01 offer. There are eight traders wanting to buy BAC stock; this represents demand. Five trades bid 100 shares each at $30, three traders at $29.99, and one trader at $29.98. These orders are listed on the bid.

There are also eight traders wanting to sell BAC stock; this represents supply. Five sell 100 shares each at $30.01, three at $30.02, and one at $30.03. These orders are listed on offer.

Say a new trader comes in and wants to buy 800 shares at the market price. The market price, in this case, is all the prices and shares it will take to fill the order.

This trader has to buy at the offer: 500 shares at $30.01, and 300 at $30.02. Now the spread widens, and the price is $30 by $30.03 because all the share offered at $30.01 and $30.02 have been bought. Since $30.02 was the last traded price, this is the market price.

Other traders may take action to close the spread. Since there are more buyers, the spread is closed by the bid adjusting upward. The result is a new price of $30.02 by $30.03, for example. This interaction is continually taking place in both directions which adjusts the price.