I get that supply and demand sets the price but WHO actually dictates the price?
Like do a special group of brokers negotiate a price, make a transaction and then that is the price on the market? Is it an algorithm and if so How did this work before computers
In: Economics
Playing EVE Online is a really good intro into how markets work. When you buy a stock, you’re actually putting up a “buy order” that other traders can sell to. Similarly, there’s a “sell order” that other traders can buy from. When you create either order, you can set a price. If you set the price of a buy order too low or if you set the sell order too high, you won’t get any offers.
Any time there is a sale in either direction, the amount sold and the price it was sold for is recorded by the “market”. In the real world, the market is the exchange being traded on (i.e., New York Stock Exchange). The price you see quoted is usually the average of the trade prices for that particular stock over a given time period.
You might then wonder, “who sets the price to begin with?” Well, the answer is nobody, really. It’s one of the reasons you see IPOs for companies with huge opening prices. No one really “knows” the price of a stock, they’re just guessing and at the very beginning they don’t have much else to go on besides hype and press releases.
As time goes on, people see how the company actually performs and traders adjust their assessments of what that stock *should* be worth. In a lot of cases, the price goes down simply because when it comes time to sell stock after an IPO no one wants to buy it for the high price it initially sold for.
The price eventually settles into a place where traders will buy and sell readily. This is a mostly organic process; no one is dictating prices, sellers are just lowering/raising their offers until they get a buyer that will make them the most money.
EDIT: I should point out that this is how markets are *supposed* to work. There are all manner of things people can do to influence prices because the “market” can’t control for greed. For example, if you own a large percentage of the available shares you can effectively drive the price up by simply not selling. This reduces the the number of possible sell orders for interested buyers and if there are more buyers than sellers, the buy order price will go up as the buyers compete with each other.
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