How Stock Prices Are Set | How Do Stocks Work?

Nobody sets a stock’s price. The price you see is simply the most recent price at which a buyer and a seller agreed to trade, and it changes every time a new trade happens at a different level.

In short: every listed stock has an order book: a list of standing offers to buy (bids) and to sell (asks). A trade happens when someone accepts a price on the other side. If buyers are more eager than sellers, they accept higher asks and the price rises. If sellers are more eager, they accept lower bids and the price falls. News matters because it changes what people think the company’s future profits are worth, which changes how eager they are.

The order book

Here is a simplified order book for a hypothetical stock, Maple Widgets Inc., on a single exchange:

Bids (buyers)	Shares	Asks (sellers)	Shares
$40.00	800	$40.05	500
$39.98	1,200	$40.08	700
$39.95	2,000	$40.12	1,500

The best bid is $40.00: someone is willing to buy 800 shares at that price.
The best ask is $40.05: someone is willing to sell 500 shares at that price.
The gap between them, $0.05, is the bid-ask spread. (More in bid-ask spread explained.)
No trade happens while the best bid is below the best ask. The book just sits there.

Orders that sit on the book waiting are limit orders: “buy at $40.00 or less,” “sell at $40.05 or more.” Orders that demand an immediate fill at the best available price are market orders. The full menu is in stock order types.

A trade happens

A buyer sends a market order for 300 shares. It matches against the best ask: 300 shares trade at $40.05. The “last price” on every screen becomes $40.05. The ask side now shows 200 shares left at $40.05.

Walking the book

Now a seller sends a market order to sell 2,500 shares. It fills against the bids, best first:

Price	Shares filled	Value
$40.00	800	$32,000.00
$39.98	1,200	$47,976.00
$39.95	500	$19,975.00
Total	2,500	$99,951.00

The seller’s average price is $99,951 ÷ 2,500 = $39.9804. The last trade printed at $39.95, so the quoted price fell $0.10 from the $40.05 trade a moment earlier, without any news at all. One impatient seller consumed the available demand at the top of the book. That is the mechanical meaning of “more sellers than buyers”: not that there are more sellers than buyers in the trade (each trade has exactly one of each), but that sellers were willing to accept lower prices to get out.

On a large, heavily traded stock, the book is much deeper, and a 2,500-share order barely moves the price. On a small, thinly traded stock, it can move it a lot. That depth is what liquidity means in practice.

Tick sizes: the price grid

Prices move in minimum steps called ticks.

United States: under SEC Rule 612, stocks priced at $1.00 or more are generally quoted in increments no smaller than one cent. US markets moved from fractions (such as 1/16 of a dollar) to decimals in 2001. In 2024 the SEC adopted a half-cent tick for some heavily traded stocks, but the compliance date has been pushed back more than once; check the current status before relying on it.
Canada: under CIRO’s Universal Market Integrity Rules, the minimum increment is $0.01 for orders priced at $0.50 or more, and $0.005 below $0.50.

Openings, closings, and auctions

Prices don’t only come from continuous trading. Exchanges run auctions at the open and close, collecting orders for a period and then finding the single price at which the most shares can trade. The NYSE’s opening and closing auctions are run with the designated market maker, Nasdaq runs an Opening Cross and Closing Cross, and the TSX has its own opening and market-on-close facilities.

The closing price is usually the closing auction price, which is why so much volume trades in the last minutes of the day: index funds and other institutions that are measured against the close want to trade at that price.

Overnight, no regular trading happens, but news keeps arriving. That is why a stock can close at $40 and open at $36 with no trades in between. Such a jump is called a gap.

Why prices move on news

The order book explains how a price is set. It doesn’t explain why buyers and sellers change their minds. For that, think of a share as a claim on the company’s future profits. Investors are constantly estimating what those profits will be and how much they are willing to pay for them today.

A common shorthand for “how much they are willing to pay” is the price-to-earnings ratio, covered in P/E ratio explained.

A worked example: an earnings surprise

Investors expect Maple Widgets to earn $5.00 per share next year, and the stock trades at 20 times expected earnings:

Price = 20 × $5.00 = $100.00

After the market closes, the company reports results and cuts its outlook. Investors now expect $4.50 per share.

If they still pay 20 times earnings: 20 × $4.50 = $90.00, a 10% drop.
If they also decide the business deserves a lower multiple, say 18 times, because growth looks slower: 18 × $4.50 = $81.00, a 19% drop.

Earnings fell 10%, but the price could fall nearly twice as much, because the news changed two things at once: the estimate of profits and the confidence in that estimate. The opposite happens on good news. This is why prices can move sharply on earnings day; see how earnings reports work.

Other things that move prices

Interest rates. Higher rates make future profits worth less in today’s money and make bonds more attractive as an alternative, which tends to pressure stock prices, especially for companies whose profits are far in the future.
The economy and industry news. A recession forecast, a commodity price swing, or a competitor’s announcement can change expectations for many companies at once.
Flows. Large buy or sell programs, such as index additions or fund redemptions, can push prices temporarily even without new information about the business.
Sentiment. Fear and enthusiasm change how much investors are willing to pay for the same expected profits.

Guardrails on price moves

Markets have mechanisms to slow down extreme moves:

Single-stock pauses. In the US, the “Limit Up-Limit Down” plan pauses trading in a stock if its price moves outside a band around its recent average price. In Canada, CIRO operates single-stock circuit breakers for many securities.
Market-wide circuit breakers. If the S&P 500 falls 7% or 13% from the prior day’s close before 3:25 p.m. Eastern, US trading pauses for 15 minutes; a 20% fall halts trading for the rest of the day. CIRO halts Canadian marketplaces in coordination with these US triggers.

Market value is not cash

Headlines often say a fall in a stock “wiped out” billions of dollars. It’s worth understanding what that means.

Suppose Maple Widgets has 50,000,000 shares outstanding. At $40.05, its market capitalization is 50,000,000 × $40.05 = $2,002,500,000. After the 2,500-share sale above, the last price is $39.95, and the market capitalization is 50,000,000 × $39.95 = $1,997,500,000. On paper, $5,000,000 of value has “disappeared.”

But only 2,500 shares traded at the lower prices, about $100,000 worth. Nobody handed over $5 million. What changed is the price at which shares last traded, and every holder’s statement now values their shares at that price. Market capitalization is a marking of all shares at the latest trade, not a pile of money that grows or shrinks. This is why prices of thinly traded stocks can swing so much: a few small trades can re-mark the whole company.

The same logic runs in reverse. A stock that rises 10% on light volume hasn’t attracted billions of new dollars. Buyers were willing to pay more for the few shares that changed hands, and holders who didn’t trade now have a higher paper value that they would only realize by selling, at whatever price the book offers at that moment.

What can go wrong

Market orders in thin books. As the walking-the-book example shows, a market order can fill well away from the quoted price. Limit orders cap the price you accept.
Gaps. A stop order to sell at $38 does not guarantee $38. If the stock opens at $34, a regular stop becomes a market order and fills near $34.
Stale quotes. Before the open, after the close, or during a halt, the last price on screen can be far from where the stock will next trade.
Mistaking price for value. A falling price does not make a stock “cheap,” and a rising one does not make it “expensive.” Price only tells you where the last trade happened.

The takeaway

A stock price is the latest point of agreement between a buyer and a seller in the order book. It moves when one side becomes more eager and accepts the other side’s price, and eagerness changes when news changes investors’ estimates of future profits or their confidence in those estimates. Understanding the order book helps you avoid paying more than you need to; understanding the second part explains why prices move at all.