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World 0 · Start Here · lesson 3 · level 1

How a price is made

A price is simply where a buyer and a seller agree, so when more people want to buy than sell the price rises, and when more want to sell it falls.

In one line

Nobody sets the price of a share on their own. So where does it come from?

Explained simply

Imagine the last mango at a stall and three people who all want it. They start offering more and more, so the price goes up. If every stall has too many mangoes and only a few shoppers come, sellers lower their prices to make a sale, so the price goes down.

The lesson

A price is the amount a buyer and a seller agree on in a trade, and the latest agreed price is the one you see on a screen. When more people want to buy than want to sell at today's price, buyers offer more and the price rises; when more want to sell than buy, sellers accept less and the price falls. On an exchange, the highest price any buyer is offering is called the bid, and the lowest price any seller will accept is called the ask. Every share bought is also a share sold, so what moves the price is which side is keener to trade right now.

A worked example

Illustrative example: mangoes sell for 20 rupees each. On a hot day, 6 shoppers want mangoes but only 3 are left, so buyers offer 22, then 24, and the last one sells for 24 rupees: a rise of 4 rupees (24 minus 20), or 20% (4 divided by 20, times 100). The next day, stalls are full of mangoes and few shoppers come, so sellers cut the price to 18 rupees: a fall of 6 rupees (24 minus 18), or 25% (6 divided by 24, times 100). Shares on an exchange move the same way, only much faster.

The same idea at four levels

1. Beginner. A price is where a buyer and a seller agree.
2. Foundation. More people keen to buy pushes the price up, and more people keen to sell pushes it down.
3. Intermediate. The bid is the highest price a buyer is offering, and the ask is the lowest price a seller will accept.
4. Advanced. Every share bought is also a share sold, so price moves because one side is keener, not because it is bigger.
5. Expert. News, fear and excitement change how keen buyers and sellers are, which is why prices can jump in seconds.

Mistakes to avoid

• Thinking the exchange or the company sets the share price, when it comes from trades between buyers and sellers.
• Thinking a rising price means more shares were bought than sold, when every share bought is also a share sold.
• Thinking a price that rose today must keep rising tomorrow, when buyers and sellers can change their minds at any moment.

Goal of this lesson: Explain how buyers and sellers set a price together, and why keen buyers push it up and keen sellers push it down.