Supply and Demand – Bid/Ask. This defines the Stock Market

Five holders of the stock in company ABC Corp. each have 100 shares.  Paul wants to sell his shares for $80 a share, Mary wants to sell her 100 shares for $83 a share, Greg is not interested in selling any of his shares right now (being a longer-term investor),  Bill wants $85 for each of his shares, and Andrew wants $78 for half his shares, keeping the other half longer term.  This means there are 350 shares available for purchase as shown in the following table, representing the Supply side of this market. Supply and Demand is a facsinating subject!


Fig. 1  Market Supply

You want to buy 100 shares at $76, John hopes to buy 100 shares at $74, Frances wants to buy 100 shares at $75, Clint wants 100 shares at $77.  This represents the Demand side of this market.

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Fig. 2  Market Demand

Here’s another way to look at this picture:

Paul is willing to sell his 100 shares of ABC at $80 a share.  We could say Paul is offering his 100 shares at $80 a share OR that he is asking $80 a share for his 100 shares of ABC.  The same for Mary, Bill and Andrew.  This means the Ask or offer price represents the price at which sellers are willing to sell their stock.

On the Demand side:

  You are the first potential buyer willing to buy 100 shares of ABC at $76 a share.  Since you are willing to pay $76 per share for ABC, we can also say you are bidding $76 a share for ABC.  Likewise, John, Frances and Clint are bidding for 100 shares each at $74, $75, and $77 a share.

We can put this all into a new table for Supply and Demand, changing the labels of Demand to Bid and Supply to Ask:

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For this example, the inside market will be the best Bid and the best Ask:

ABC Bid $77  Ask $78

What this means is if someone wanted to buy 100 shares of ABC at the market (using a market order to buy) they would get an order fill at $78 a share.  Someone who wanted to sell 100 shares of ABC at the market (using a market order to sell) would get a fill at $77 a share.

Whenever we look at a quote table, the Bid represents buyers (or demand) and the Ask represents sellers (or supply).

So, as the current supply and demand balance is shown, nothing happens. That is, no one will accept any share-deal offered. How does the market work? Simply, someone blinks! Either a buyer or a seller will accept something less than desired. This punches up the emotion involved in all market transactions. Why would I accept something less? Only if I believed, felt like, was encouraged to, considered a pending change.  And so goes the battle…

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