tock Market Supply and Demand

The stock market also offers a fascinating example of the laws of supply and demand
at work in real-time. For every stock transaction, there must be a buyer and a
seller. Because of the immutable laws of supply and demand, if there are more
buyers for a specific stock than there are sellers of it, the stock price will
trend up. Conversely, if there are more sellers of the stock than buyers, the price
will trend down.

The bid-ask or bid-offer spread (the difference between the bid price for a stock
and its ask or offer price) represents the difference between the highest price
that a buyer is willing to pay or bid for a stock and the lowest price at which a
seller is offering the stock.

A trade transaction occurs either when a buyer accepts the ask price or a seller
takes the bid price. If buyers outnumber sellers, they may be willing to raise
their bids in order to acquire the stock. Sellers will, therefore, ask higher
prices for it, ratcheting the price up. If sellers outnumber buyers, they may be
willing to accept lower offers for the stock, while buyers will also lower their
bids, effectively forcing the price down.

Matching Buyers to Sellers

Some stock markets rely on professional traders to maintain continuous bids and
offers since a motivated buyer or seller may not find each other at any given
moment. These are known as specialists or market makers.

A two-sided market consists of the bid and the offer, and the spread is the
difference in price between the bid and the offer. The more narrow the price spread
and the larger size of the bids and offers (the amount of shares on each side), the
greater the liquidity of the stock. Moreover, if there are many buyers and sellers
at sequentially higher and lower prices, the market is said to have good depth.

Matching buyers and sellers of stocks on an exchange was initially done manually,
but it is now increasingly carried out through computerized trading systems. The
manual method of trading was based on a system known as the open outcry system,
where traders used verbal and hand signal communications to buy and sell large
blocks of stocks in the trading pit or the exchange floor.

However, the open outcry system has been superseded by electronic trading systems
at most exchanges. These systems can match buyers and sellers far more efficiently
and rapidly than humans can, resulting in significant benefits such as lower
trading costs and faster trade execution.

High-quality stock markets tend to have small bid-ask spreads, high liquidity, and
good depth, which means that individual stocks of high quality, large companies
tend to have the same characteristics.
Benefits of Stock Exchange Listing
Until recently, the ultimate goal for an entrepreneur was to get his or her company
listed on a reputed stock exchange such as the NYSE or Nasdaq, because of the
obvious benefits, which include: