How are prices made?

When an app tells you a stock costs 100 euros, that is its price. It tells you where a buyer and a seller last agreed. Nothing more. There is no authority and no head of the exchange deciding it. The price is simply what the last trade was done at. If the next trade happens at a different price, the price changes.

Anyone who wants to buy or sell places an instruction, called an order. The exchange collects all these orders in one list: the order book. Buy orders sit on one side, sell orders on the other. The highest price a buyer is currently willing to pay is called the bid. The lowest price a seller is currently willing to accept is called the ask.

Anna wants to buy a share and will pay at most 99.80 euros. Ben wants to sell, but not for less than 100.20 euros. There are 40 cents between them, so nothing happens. Then Clara arrives. She wants to sell right away and takes the best price on offer: Anna's 99.80 euros. The trade goes through, and the new price is 99.80 euros. The gap between bid and ask is called the spread. For large, heavily traded stocks it is usually very small.

If more people want to buy than sell, buyers have to offer more, and the price rises. If more want to sell, it falls. What drives people one way or the other? Mostly expectations. A company reports strong profits, a new product sells well, or interest rates change. Investors keep asking one question: what will this company earn in the future? The price is the market's shared answer, and it changes with every new piece of information.

In the short run, prices often swing more than the business behind them would justify. Fear and excitement play a part. A stock can drop five percent in a day although nothing about the business has changed. Over the long run, prices tend to follow what a company actually earns. That is why it pays not to take every daily move too seriously. On XETRA, by the way, there is an auction at the open, at midday and at the close. It looks for the price at which the largest number of shares can change hands.

When a price rises, you can sell your share for more than you paid. That is one way to make money with stocks. There is a second way that needs no selling at all: many companies regularly hand part of their profit to their shareholders. That is the next chapter.