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What is the market price?

Market price definition

In economics, the market price is the amount of money an asset can be sold for on an open market. A simple market price definition specific to financial markets is that it is the price of the most recent transaction for a security on a traded market such as a stock exchange.

Where have you heard about market price?

You may have come across the term when looking at pricing information for stocks, bonds, funds and commodities. If you have traded financial instruments such as stocks, you will have bought and sold them at the market price.

What do you need to know about market price?

Market prices are quoted as ‘bid’ and ‘ask’ spreads. When an investor buys a security the market price they pay is the ask; when the investor sells, the market price is the bid. The ask is the lowest price a seller will accept, and a bid is the highest price a buyer will pay. Selling a security at a higher price than they paid, after transaction costs, is how investors make profits and increase the size of their portfolio.

The market price for each security is set during exchange trading hours by traders, brokers and dealers placing bids and asks. Trades are executed when there are bids and asks placed at the same price. Market prices for the most liquid assets fluctuate continuously during the trading session, while less liquid assets can remain at the same price for several hours or even days.

When trading an asset, a market order places a trade at the current market price during the trading session, or at the opening market price during the next session if the market is closed when it is placed. The other order types of orders, such as a limit order, a stop-loss order, a take-profit order and a recurring order, allow you to specify the market price to buy or sell, while the market order prioritises executing the trade regardless of the price.  

To take a market price example, let’s assume a stock has bid prices up to $24.99 and ask prices at $25.01 and above. When an investor places a market order to buy it will execute at $25.01. This becomes the market price and bids will need to move up to complete the next trade. Conversely, if there is a market order to sell it will be filled at the new market price of $24.99 and asks will move down. If the bids or asks do not move, the bid-ask spread, or the difference between the prices, will widen – to $24.99-25.02 or $24.98-$25.01 in the example.

Deciding at what market price to buy and sell a stock is one of the major decisions investors need to make. Market prices rise and fall in response to a combination of company fundamentals, investor sentiment, macroeconomic factors and geopolitical events that prompt market participants to buy or sell stocks. Brokers and analysts forecast market prices and set price targets for securities based on those drivers, which can provide guidance to help investors make the decision.

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