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How the Financial Markets Work

How is a stock's price determined?

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David John Marotta
President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.
http://www.emarotta.com  
434-244-0000

David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

How is a stock's price determined?

 

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What is a bid price and an ask price?

David Marotta: The bid price is the price at which the market maker is always willing to buy stock. The ask price is the price at which the market maker is always willing to sell stock. The difference between the bid and ask price is called the spread. Spread is used to be about an eighth of a dollar. Now, they end up being pennies as the markets have gone digital and become more efficient. And the market maker makes a certain amount of money just off the bid and ask price because as there is a volume that s going on, they are always making a little bit no matter whether the stock price is moving up or down. And then they move it up or down based upon more people wanting to buy, they move the stock price up; more people wanting to sell, they move the stock price down. And they move the stock price up until it s so highly priced that other people want to sell, and they move the stock price down until it s so low priced that other people want to buy it and that s the way they keep their pool sort of event, is by moving the stock price up or down.

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