For example, if the number of Apple shares that investors want to buy is greater than the number that investors want to sell, the price of Apple stock will rise. As new information about the company becomes available, changes in supply (investors who want to sell) and demand (investors who want to buy) may result in a new market price.
This process takes place through the bid-ask spread. The bid is the highest price that an investor in the market is willing to pay at a given time, while the ask is the lowest price at which someone is willing to sell. When the price of a bid and offer coincide, a trade takes place (learn more about market trades).
Financial markets streamline the process of bringing together willing buyers and sellers, allowing investors to trade quickly without incurring exorbitant transactions costs. Financial markets also establish market prices in response to new company information.
For example, a firm that launches a new product will receive valuable information about how that product will be received in the market by observing how the stock market reacts to the new launch. If investors love the new offering, demand for the stock will increase along with the stock price.
This article has been republished with permission from Cash Cow Couple.