Have you ever bought a stock and were surprised by the price you paid? Maybe you paid less than you expected or perhaps you paid more. It can be hard to keep up and understand how this situation occurs. This may happen in fast or volatile markets when prices change rapidly. So while it might seem logical that the last price of a stock is the price where it will trade next, this rarely occurs. Here's why.
Key Takeaways
- The last traded price for a stock is not necessarily the price that an investor can expect to pay for their purchase.
- The stock quote also includes bid and ask prices, which reflect the prices that are available to buyers and sellers at the time.
- Bid and ask prices are always changing as collective buying and selling moves markets from one moment to the next.
- Using limit orders rather than market orders can ensure that you are not paying more for the stock than what you intended.
Factors That Affect Stock Prices
Before we take a look at how stock prices work, it's a good idea to understand the factors that affect movements in share prices.
- Supply and Demand: This is perhaps one of the largest influences on stock prices. When demand increases and supplies are limited, prices move in the same direction. On the other hand, when supplies rise and demand wanes, prices tend to drop. Investors typically increase their demand for a stock when a company is favored in the market or rumored to see growth.
- Corporate Activity: Company news, earnings, new product releases, , analyst ratings, and personnel changes (to name a few) can have a big impact on how stock prices move. For instance, positive earnings may propel the stock price up for a company while bad news may push another company's share prices down.
- Economy: The economy has a big impact on share prices. For instance, central banks may have to increase interest rates during times of inflation. This doesn't bode well for consumer discretionary stocks and their share prices as consumers cut back on buying luxury and discretionary goods.
- Geopolitical Events: Trade deals, regulations, and international relations can influence share prices, too. For instance, Russia's invasion of Ukraine had a major impact on global energy prices and the share prices of energy companies.
The world's first common stock was issued in 1602 by the Dutch East India Company.
How Stock Prices Work
The last price of a stock is just one price to consider when buying or selling shares. That's because the last price is simply the most recent one. For example, shares of Microsoft (MSFT) may open the trading day at $50 per share, jump to $51, go back to $50, and then close the day at $49. Since the last price is the most recent trade or print, the last price is $49 per share.
A stock quote includes more than just the last price. It also includes its bid and ask price, where:
- The bid price is the best available price for sellers, as it reflects the highest price that somebody is willing to pay for the stock.
- The ask or offer price is the price that sellers are willing to accept from buyers.
Investors can use the last traded price to gauge where the market is and the activity that other investors have recently done. But once this price is posted, it might not be the actual price you pay if you decide to buy the security.
The better indicator is the quote, which includes both the bid and ask prices. These prices also change, as buyers and sellers adjust their bids and offers from one minute to the next. This means there are no guarantees that an order will be executed at the bid or ask price either.
Effective Order Types
When you place a market order, you ask for the market price. This means you buy at the lowest ask price or sell at the highest bid that is available for the stock. These prices are normally given to you when you request a quote. You can ask your broker for these prices or see them online through your online trading platforms.
But if you want to buy or sell a stock at a specific price, it may be more advisable to use a limit order to do so. This way, you can be sure that all your buy orders will be filled at a price that is equal to or lower than your specified price level. Conversely, a sell limit order will ensure your sell order is executed at a price that is equal to or higher than the price level that you want.
Should I Hold Stocks in my Portfolio?
Stocks are an important part of any financial or investment portfolio. That's because they have the potential to grow over time—especially if you hold them for longer periods. Investing in stocks allows you to invest in different companies and industries, which helps you diversify your holdings so you aren't putting all your eggs in one basket. The percentage of stocks you hold in your portfolio depends on several factors, including your stage of life, risk tolerance, goals, and financial situation.
How Do Exchange-Traded Funds Trade?
Exchange-traded funds (ETFs) trade just like stocks. Investors can buy and sell ETF shares the same way they would with a company's stock. This means that shares trade on stock exchanges and prices are updated regularly during the trading day based on supply, demand, and other factors. These investments are also similar to mutual funds because they pool money from multiple investors and invest it in a basket of securities.
Where Can I Find Stock Prices?
Stock prices are easy to find. You can locate share prices for specific companies on their website—usually on their investor relations page. You can also look for stock prices on financial websites, through stock exchanges, brokerages, trading apps, and financial institutions. You can use Investopedia's Markets Today page to give you current stock prices for any company.
The Bottom Line
Stocks represent a small fraction of ownership in a company. Companies issue stock to investors to raise money for their growth or to fund their operations. Different factors can affect stock prices, including supply and demand, as well as important company news. But, understanding how these prices work is important for any investor and can help you decide whether to buy or sell stock—and when.
