Why is the buy price different from the sell price of a stock? [duplicate]
When there is a difference between the two ... no trading occurs. Let's look at an example: Investor A, B, C, and D all buy/sell shares of company X. Investor A wants to sell 10 shares at $20 a share (Ask price $20 x10). Investor B wants to buy 15 shares at $10 a share (Bid price $10 x15). Since the bid price and ask price are different, no sale is made. Next Investor C comes along and wants to sell 5 shares at $14 (Ask price $14 x5). Still no sale. Investor D comes along and wants to buy 5 shares for $14 each. So a sale is finally made. At this point, the stock quote moves to $14. The ask price is $20 x10 and the bid price is $10 x15. No further trading will occur until another investor is willing to buy at $20 or sell at $10.  Another discussion of this topic is shown on this post. This is called the Ask-Bid Spread. The difference varies based on the liquidly of the asset. The more liquid or the higher the volume of trades for the asset then the smaller the spread is. The spread goes to the broker to pay for some of the cost of the trade. My guess is that when there is a higher volume of shares being traded, brokers need to take less of a fee per share out of the transaction to cover their costs. This makes the spread is smaller.  This is essentially the difference in   price between the highest price that a   buyer is willing to pay for an asset   and the lowest price for which a   seller is willing to sell it. The seller will get the bid price and the buyer will pay the ask and the broker keeps the spread. From http://www.investopedia.com/terms/b/bid-askspread.asp
"The argument you are making here is similar to the problem I have with the stronger forms of the efficient market hypothesis.  That is if the market already has incorporated all of the information about the correct prices, then there's no reason to question any prices and then the prices never change.  However, the mechanism through which the market incorporates this information is via the actors buying an selling based on what they see as the market being incorrect. The most basic concept of this problem (I think) starts with the idea that every investor is passive and they simply buy the market as one basket.  So every paycheck, the index fund buys some more stock in the market in a completely static way.  This means the demand for each stock is the same.  No one is paying attention to the actual companies' performance so a poor performer's stock price never moves.  The same for the high performer.  The only thing moving prices is demand but that's always up at a more or less constant rate. This is a topic that has a lot of discussion lately in financial circles.  Here are two articles about this topic but I'm not convinced the author is completely serious hence the ""worst-case scenario"" title. These are interesting reads but again, take this with a grain of salt.  You should follow the links in the articles because they give a more nuanced understanding of each potential issue.  One thing that's important is that the reality is nothing like what I outline above. One of the links in these articles that is interesting is the one that talks about how we now have more indexes than stocks on the US markets.  The writer points to this as a problem in the first article, but think for a moment why that is.  There are many different types of strategies that active managers follow in how they determine what goes in a fund based on different stock metrics.  If a stocks P/E ratio drops below a critical level, for example, a number of indexes are going to sell it.  Some might buy it.  It's up to the investors (you and me) to pick which of these strategies we believe in. Another thing to consider is that active managers are losing their clients to the passive funds.  They have a vested interest in attacking passive management." "I am assuming you mean derivatives such as speeders, sprinters, turbo's or factors when you say ""derivatives"". These derivatives are rather popular in European markets. In such derivatives, a bank borrows the leverage to you, and depending on the leverage factor you may own between 50% to +-3% of the underlying value. The main catch with such derivatives from stocks as opposed to owning the stock itself are: Counterpart risk: The bank could go bankrupt in which case the derivatives will lose all their value even if the underlying stock is sound. Or the bank could decide to phase out the certificate forcing you to sell in an undesirable situation. Spread costs: The bank will sell and buy the certificate at a spread price to ensure it always makes a profit. The spread can be 1, 5, or even 10 pips, which can translate to a the bank taking up to 10% of your profits on the spread.  Price complexity: The bank buys and sells the (long) certificate at a price that is proportional to the price of the underlying value, but it usually does so in a rather complex way. If the share rises by €1, the (long) certificate will also rise, but not by €1, often not even by leverage * €1.  The factors that go into determining the price are  are normally documented in the prospectus of the certificate but that may be hard to find on the internet. Furthermore the bank often makes the calculation complex on purpose to dissimulate commissions or other kickbacks to itself in it's certificate prices.  Double Commissions: You will have to pay your broker the commission costs for buying the certificate. However, the bank that issues the derivative certificate normally makes you pay the commission costs they incur by hiding them in the price of the certificate by reducing your effective leverage. In effect you pay commissions twice, once directly for buying the derivative, and once to the bank to allow it to buy the stock.  So as Havoc P says, there is no free lunch. The bank makes you pay for the convenience of providing you the leverage in several ways. As an alternative, futures can also give you leverage, but they have different downsides such as margin requirements. However, even with all the all the drawbacks of such derivative certificates, I think that they have enough benefits to be useful for short term investments or speculation." When you want to short a stock, you are trying to sell shares (that you are borrowing from your broker), therefore you need buyers for the shares you are selling.  The ask prices represent people who are trying to sell shares, and the bid prices represent people who are trying to buy shares. Using your example, you could put in a limit order to short (sell) 1000 shares at $3.01, meaning that your order would become the ask price at $3.01.  There is an ask price ahead of you for 500 shares at $3.00.  So people would have to buy those 500 shares at $3.00 before anyone could buy your 1000 shares at $3.01. But it's possible that your order to sell 1000 shares at $3.01 never gets filled, if the buyers don't buy all the shares ahead of you.  The price could drop to $1.00 without hitting $3.01 and you will have missed out on the trade. If you really wanted to short 1000 shares, you could use a market order.  Let's say there's a bid for 750 shares at $2.50, and another bid for 250 shares at $2.49.  If you entered a market order to sell 1000 shares, your order would get filled at the best bid prices, so first you would sell 750 shares at $2.50 and then you would sell 250 shares at $2.49. I was just using your example to explain things.  In reality there won't be such a wide spread between the bid and ask prices.  A stock might have a bid price of $10.50 and an ask price of $10.51, so there would only be a 1 cent difference between putting in a limit order to sell 1000 shares at $10.51 and just using a market order to sell 1000 shares and getting them filled at $10.50. Also, your example probably wouldn't work in real life, because brokers typically don't allow people to short stocks that are trading under $5 per share. As for your question about how often you are unable to make a short sale, it can sometimes happen with stocks that are heavily shorted and your broker may not be able to find any more shares to borrow. Also remember that you can only short stocks with a margin account, you cannot short stocks with a cash account. There are two main ways you can make money through shares: through dividends and through capital gains. If the company is performing well and increasing profits year after year, its Net Worth will increase, and if the company continues to beat expectations, then over the long term the share price will follow and increase as well. On the other hand, if the company performs poorly, has a lot of debt and is losing money, it may well stop paying dividends. There will be more demand for stocks that perform well than those that perform badly, thus driving the share price of these stocks up even if they don't pay out dividends. There are many market participants that will use different information to make their decisions to buy or sell a particular stock. Some will be long term buy and hold, others will be day traders, and there is everything in between. Some will use fundamentals to make their decisions, others will use charts and technicals, some will use a combination, and others will use completely different information and methods. These different market participants will create demand at various times, thus driving the share price of good companies up over time. The annual returns from dividends are often between 1% and 6%, and, in some cases, up to 10%. However, annual returns from capital gains can be 20%, 50%, 100% or more. That is the main reason why people still buy stocks that pay no dividends. It is my reason for buying them too. How I understand it is: supply/demand affect price of stock   negatively/positively, respectively. Correct. Volume is the amount of buying/selling activity in these stocks (more   volume = more fluctuation, right?). Sort of.  Higher volume means higher liquidity.  That is, a stock that is traded more is easier to trade.  It doesn't necessarily mean more fluctuation and in the real world, it often means that these are well-understood stocks with a high amount of analyst coverage.  This tends towards these stocks not being as volatile as smaller stocks with less liquidity. Company revenue (and profit) will help an investor predict company   growth. That is one factor in a stock price.  There are certain stocks that you would buy without them making a profit because their future revenue looks potentially explosive.  However, these stocks are very risky and are bubble-prone. If you're starting out in the share market, it's generally a good idea to invest in index funds (I am not a broker, my advice should not be taken as financial advice).  These funds aggregate risk by holding a lot of different companies.  Also, statistics have shown that over time, buying and holding index funds long term tends to dramatically outperform other investment strategies, particularly for people with low amounts of capital. I think the simple answer to your question is: Yes, when you sell, that drives down the price. But it's not like you sell, and THEN the price goes down. The price goes down when you sell. You get the lower price.  Others have discussed the mechanics of this, but I think the relevant point for your question is that when you offer shares for sale, buyers now have more choices of where to buy from. If without you, there were 10 people willing to sell for $100 and 10 people willing to buy for $100, then there will be 10 sales at $100. But if you now offer to sell, there are 11 people selling for $100 and 10 people buying for $100. The buyers have a choice, and for a seller to get them to pick him, he has to drop his price a little. In real life, the market is stable when one of those sellers drops his price enough that an 11th buyer decides that he now wants to buy at the lower price, or until one of the other 10 buyers decides that the price has gone too low and he's no longer interested in selling. If the next day you bought the stock back, you are now returning the market to where it was before you sold. Assuming that everything else in the market was unchanged, you would have to pay the same price to buy the stock back that you got when you sold it. Your net profit would be zero. Actually you'd have a loss because you'd have to pay the broker's commission on both transactions. Of course in real life the chances that everything else in the market is unchanged are very small. So if you're a typical small-fry kind of person like me, someone who might be buying and selling a few hundred or a few thousand dollars worth of a company that is worth hundreds of millions, other factors in the market will totally swamp the effect of your little transaction. So when you went to buy back the next day, you might find that the price had gone down, you can buy your shares back for less than you sold them, and pocket the difference. Or the price might have gone up and you take a loss. Bid and ask prices of stocks change not just daily, but continuously.  They are, as the names suggest, what price people are asking for to be willing to sell their stock, and how much people are bidding to be willing to buy it at that moment. Your equation is accurate in theory, but doesn't actually apply.  The bid and ask prices are indicators of the value of the stock, but the only think you care about as a trader are what you actually pay and sell it for.  So regardless of the bid/ask the equation is: Since you cannot buy an index directly (index, like indicator) it doesn't make sense to discuss how much people are bidding or asking for it.  Like JoeTaxpayer said, you can buy (and therefore bid/ask) for ETFs and funds that attempt to track the value of the S&P 500. "Feel free to educate man. Everything I can find says the same thing.  [Investopedia](http://www.investopedia.com/ask/answers/100314/what-are-key-factors-cause-market-go-and-down.asp)  &gt;If there are a greater number of buyers than sellers (more demand), the buyers bid up the prices of the stocks to entice sellers to get rid of them. Conversely, a larger number of sellers bids down the price of stocks hoping to entice buyers to purchase.  Yes, if a company is performing well, you might find that more people want to buy then sale.  That would cause it to go up.  But if no one wants to buy, it doesn't matter how well the company is doing.  I mean really, how would that work?  Someone in the company notices they had more sales today then yesterday, email someone on wallstreet and they just mouse wheel the stock price up to something higher?  Say the stock is $1.00 right now.  But the lowest buy order is $.90.  and the highest sale order is $1.10.  (I guess there is some math there making is $1.)  As soon as someone says, yeah.  I'll sale at 90 cents, it'll go down.  If someone says yeah, I'll buy at $1.10 it'll go up.    I'm sure there is more to it than that.  But everything I can find.  It 100% has to have people more people wanting to buy then sale for it to go up.  If more want to sale then buy, it'll go down.   But hey, if this is way off base.  Go ahead and fill me in.  I'm open to CMV.  This was all found after a short amount of time researching [""What makes stock prices go up?""](https://www.google.com/search?q=What+makes+stock+prices+go+up%3F&amp;oq=What+makes+stock+prices+go+up%3F&amp;gs_l=psy-ab.3..0i71k1l4.43421.43421.0.43882.0.0.0.0.0.0.0.0..0.0....0...1.1.64.psy-ab..0.0.0....0.6Crfejzb3XY)"