What a Market Is

You already know how a market works. If you have ever sold something online, haggled at a yard sale or watched an auction, you have seen every idea in this class.

New words in this class: market, price and trade.

A market is people agreeing on prices

A market is any place where buyers and sellers meet. A farmers’ market, an auction website, the currency booth at an airport: all markets. The ones traders use are on computers, and they never close for long, but they work exactly the same way.

Every buyer has a price they are willing to pay. Every seller has a price they are willing to accept. Most of the time they don’t agree, so nothing happens. Then one buyer decides to pay a little more, or one seller decides to take a little less, and they meet:

That meeting is a trade: one person buys and another sells, at the same moment, at the same price.

The price is just the last deal

Here is the idea that surprises most beginners: the price you see on a chart is simply the price of the most recent trade. Nothing more mysterious than that.

• If buyers are keen and keep paying a bit more, each new deal happens a bit higher. Price rises.
• If sellers are keen and keep accepting a bit less, each new deal happens a bit lower. Price falls.
• If nobody is in a hurry, deals happen around the same price. Price drifts sideways.

So when you look at a chart, you are looking at a story about people: who was keener, the buyers or the sellers?

Why do keen buyers or sellers show up?

Lots of reasons: news, a company’s results, a change in interest rates, or simply lots of people noticing the same thing on a chart. You don’t need to know the reason to read the chart. The chart already shows you what happened; your job, as you will see in the next classes, is to read it.

Remember

• A market is buyers and sellers looking for a price they both accept.
• A trade happens when a buyer pays at least what a seller asks.
• The price on the screen is the last trade. Keen buyers push it up; keen sellers push it down.