How Prices Are Set
Watch a stock price ticker for five minutes and you'll see the number twitch up and down constantly, seemingly at random — but every single tick is the result of a real buyer and a real seller agreeing on a price, and understanding that process demystifies almost everything you see in financial news.
Supply and demand applied to financial assets
The same supply-and-demand logic you'd use for hawker stall prices applies directly to stocks, bonds, and every other financial asset. If more people want to buy a stock than want to sell it at the current price, buyers start bidding the price up to convince a seller to part with their shares. If more people want to sell than want to buy, sellers start cutting their asking price to attract a buyer. A stock's price at any given moment is simply the level at which the number of shares buyers want to purchase matches the number of shares sellers are willing to part with — the point where supply and demand clear.
What makes financial markets slightly different from a hawker stall is speed and scale: prices can adjust thousands of times a second as new orders flow in, because the "product" being priced is standardized (one share of Apple is identical to any other share of Apple) and the entire matching process is run by computers.
The bid-ask spread, explained simply
At any moment, a stock actually has two prices, not one. The bid is the highest price a buyer is currently willing to pay. The ask (or "offer") is the lowest price a seller is currently willing to accept. The gap between them is called the bid-ask spread — the difference between the highest price a buyer will pay and the lowest price a seller will accept for the same asset at the same moment. If you want to buy immediately, you pay the ask price; if you want to sell immediately, you receive the bid price. The "market price" you see quoted in the news is usually just the price of the most recent trade, sitting somewhere between the two.
A narrow spread (a few cents on a heavily traded stock) signals a highly active, efficient market. A wide spread (sometimes dollars apart, on a thinly traded stock) signals the opposite — few buyers and sellers around, so whoever wants to trade immediately has to accept a worse price to make it happen.
Market makers and liquidity
Someone has to stand ready to buy when nobody else wants to, and sell when nobody else wants to, or trading would grind to a halt during quiet moments. That role is filled by market makers — firms that continuously quote both a bid and an ask price for a security, profiting from the small spread between them, in exchange for providing constant liquidity to the market. Their presence is what makes liquidity possible — the ease with which an asset can be bought or sold quickly without significantly moving its price. A highly liquid asset (like a large blue-chip stock) can absorb a large buy or sell order with barely a price change; an illiquid asset (like shares in a tiny, rarely traded company) might swing sharply in price from even a modest order, because there simply aren't enough market makers or ordinary participants standing by on the other side.
Why prices move: new information changes expected value
If supply and demand set the price, what makes supply and demand shift in the first place? The short answer: new information. A stock's price is, in theory, a reflection of what investors collectively believe the company is worth, based on everything currently known about it — future earnings potential, competitive position, macroeconomic conditions, and so on. When new information arrives — a product launch succeeds, a competitor stumbles, an interest rate decision changes borrowing costs across the whole economy — investors update their estimate of what the company is worth, and buy or sell accordingly, which moves the price. Prices don't move because of the news itself; they move because the news changes what people are willing to pay.
The Efficient Market Hypothesis
This idea — that prices reflect all available information — is formalized in the Efficient Market Hypothesis (EMH), the theory that asset prices fully and immediately reflect all available information, making it impossible to consistently "beat the market" through stock-picking or timing, since any new information gets priced in almost instantly. If EMH is fully true, no amount of research should let an ordinary investor reliably outperform a simple index fund, because by the time you've noticed an opportunity, the price has already adjusted to account for it.
Critics point to real, persistent counter-evidence: markets have produced bubbles (like the dot-com bubble of the late 1990s) and crashes that look nothing like rational, instantly-correct pricing; some investors, like Warren Buffett, have beaten the market over many decades in ways that are hard to fully explain as luck; and behavioral economists have documented systematic ways investors misjudge information — overreacting to bad news, underreacting to slow-building trends, following the herd. Most professional investors today land somewhere in between the two extremes: markets are efficient enough that beating them consistently is very hard and most people shouldn't try, but not so perfectly efficient that mispricing never occurs.
If everyone already knows a company will report great earnings, why might the stock price not rise when they do?
Reveal Answer
Because stock prices react to new information, not information that's already known. If analysts and investors widely expected great earnings, that expectation was already priced in — investors would have bought the stock in anticipation over the preceding weeks, pushing the price up before the announcement even happened. When the earnings report finally arrives and simply confirms what everyone already expected, there's no new information to react to, so the price may stay flat, or even fall if the results were merely "great" but not great enough to beat the very high bar investors had already priced in. This is often called "buy the rumor, sell the news" — the price move happens on the expectation, not the confirmation.