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Law of Supply and Demand

In the secondary market, a stock starts trading at a premium or discount on the IPO price. Soon, external factors start impacting the stock’s price as investors with diverse perceptions will want to buy or sell the same stock at varying prices. Hence, the stock price is now determined by the forces of supply and demand.

Here, Bid-Price (the maximum a buyer is willing to pay) and Ask-Price (the minimum a seller is willing to accept) come into play. When buyers outnumber sellers, implying a robust demand, stock price trends upwards. But when sellers dominate over buyers, the stock price falls.

As investors and traders receive new information about the company, the Bid and Ask price constantly keeps changing. The trade occurs when a Bid is matched with an Ask, but how does that happen?

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