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I did some research and the conclusion I came to was that the latest trade made is what determines the stock price.

Now I have a question. If I make a trade to sell 1 share of Microsoft at $1 will that stock be $1? I'm not sure if that's the case.

I would like a clearer explanation as to how this all works.

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    Which part of the linked article didn't you understand?
    – RonJohn
    Jun 8, 2021 at 14:40
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    You need to read up about "bid" and "ask". Stocks have no "price", it is meaningless. You might look at the last price one was sold for but that's just information. Consider the house you own? What is it's "price"? There's no "price", it is meaningless.
    – Fattie
    Jun 8, 2021 at 18:30
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    If you make a trade with who exactly, and how? Are you inviting someone over to your house and offering to sell them a share, and pocketing their dollar? How are you transferring the share to them? The thing that needs a clearer explanation here is your question, which is quite confusing. Jun 8, 2021 at 23:12

7 Answers 7

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The article in your link explains how market prices are determined:

The potential buyers announce a price they would be willing to pay, known as the "bid." The potential sellers announce a price they would be willing to sell, known as the "ask." A market maker in the middle works to create liquidity by facilitating trades between the two parties. Put simply, the ask and the bid determine stock price.

When a buyer and seller come together, a trade is executed, and the price at which the trade occurred becomes the quoted market value. That's the number you see across television ticker tapes, internet financial portals, and brokerage account pages.

In the US, the National Best Bid and Offer (NBBO) is a quote that reports the highest bid price and lowest ask (offered) price in a security, sourced from among all available exchanges.

SEC regulation NMS requires that brokers to trade at the best available ask and bid price when buying and selling securities for customers.

MSFT's NBBO quote right now is $253.40 (bid) x $253.42 (ask). If you place an order to sell one share at $1, your trade will occur at the bid price of $253.40

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    Apparently, if the OP "asks" (that's the term for an offer to sell, which is what the OP is hypothetically doing, right?) according to your statement "the National Best Bid and Offer (NBBO) is a quote that reports the [...] lowest ask (offered) price in a security" the NBBO should then report a $1 ask price, right? Jun 9, 2021 at 6:43
  • @Peter-ReinstateMonica You are confused. When do you think the NBBO would report a $1 ask price? It can't do it before he placed the ask, since he hasn't placed it yet. And it can't do it after he placed the ask, since the offer will have already executed and he isn't asking $1 anymore. Jun 9, 2021 at 6:59
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    I certainly am confused and have zero knowledge about stock market mechanics. I just quoted what you said and applied the OP's scenario. IF $1 is asked AND 1 < 253.42 AND "NBBO reports the lowest ask price" THEN NBBO reports $1. Something is probably missing ;-). Jun 9, 2021 at 7:16
  • @Peter-ReinstateMonica the executed trade price becomes the lowest (accepted) ask price if I understand correctly, thus canceling out the $1 for $253.40.
    – jwenting
    Jun 9, 2021 at 8:33
  • @Peter - Reinstate Monica - My next to last paragraph states that NMS requires that brokers to trade at the best available ask and bid price when buying and selling securities for customers. If buyers are bidding $253.40 then a seller must receive that amount even if he tries to sell for less, assuming that there is sufficient volume available at that price to completely fill the order. Jun 9, 2021 at 14:39
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The "price" of a stock is whatever you can buy/sell it for. You can't always trade for the "last" price - it depends on the price that other traders are willing to pay/sell for.

If I make a trade to sell 1 share of Microsoft at $1 will that stock be $1?

In a sense, yes, but the problem is that on an open exchange you can't sell a stock for an arbitrary amount. Why would you sell MSFT for $1 when you could sell it to a willing buyer for hundreds of times more than that? You also couldn't sell it for $1,000 - why would someone buy it from you for $1,000 when they could buy from other willing sellers for a fraction of that?

So the "price" is actually determined by the prices that willing buyer and sellers can agree on in an open market, and there's more nuance than just the "last" price.

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    Say you're short MSFT that's trading at $250 and you can sell for $1, which would be a paper gain of $249 on your short. You'd have to buy MSFT at $250 in order to sell them for $1 for a loss of $249, nullifying the gain on your short. You can't buy it for $1 for the same reason - why would someone sell it to you for $1 when they can sell it for ~$250 to someone else?
    – D Stanley
    Jun 8, 2021 at 15:04
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    Sure, but again the "price" is whatever you can buy or sell it at - if you can find a "sucker" off-market that will sell for $1 then you can profit from a short position, but that doesn't necessarily mean that anyone can sell at that price on the open market, so the effect is localized.
    – D Stanley
    Jun 8, 2021 at 15:10
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    @user109855 - You are creating hypothetical based on fanciful ideas rather than how the market actually works. There are SEC regulations that must be adhered to (see my answer). You can't buy or sell MSFT for $1 just you like the idea of doing so. Nor can you bring it's price to $1. It has an average daily volume of about 25 million shares. Millions people like you trying to sell one share is a nothing burger :->) Jun 8, 2021 at 19:18
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    @user109855 I imagine the stock price would be the price of the last trade that goes through the formal trade matching channels at the exchange, where it's not possible to independently make an agreement with another trader on a price (you just put in your order and it gets matched with whatever other orders are there). If you manage to trade stocks outside of the official channels, this seems unlikely to directly change the official price (but of course it could affect future trader behaviour, which would indirectly affect the price).
    – NotThatGuy
    Jun 9, 2021 at 1:06
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    @user109855 On most markets you are not allowed to "agree" on an arbitrary price. If John wants to buy a share of a public company for $1, but Jill wants to buy a share for $2, you are obliged to sell to Jill first for $2. Otherwise you are just transferring company and avoiding taxes. And you are not allowed to agree to buy MSFT from Jack for $1000 either if someone else is selling it for $253.
    – Džuris
    Jun 9, 2021 at 8:47
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The stock market can best be thought of as a huge, multi-seller, multi-buyer, continuous auction.

That's why you see bid and ask prices: buyers are bidding certain prices, while sellers are asking certain prices.

Only when the bid and ask prices match does a transaction occur.

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  • what about when someone enters a market order?
    – Phil Frost
    Jun 9, 2021 at 3:05
  • A market order to buy is filled at the current highest asking price (or prices, if the lot size isn't big enough to fill the order). For selling, it's filled at the current highest bidding price.
    – shim
    Jun 9, 2021 at 3:11
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    "Only when the bid and ask prices match does a transaction occur" — They don't have to match, they could also overlap.
    – shim
    Jun 9, 2021 at 3:13
  • A trader crosses the spread when he offers to buy at the ask or sell at the bid. A buyer who places a market order offers to pay the seller's price which is above what other buyers are willing to pay. Jun 9, 2021 at 15:53
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"The stock price" as it is commonly referred to, says one thing and implies another.

What it says: "This is the most recent transaction price that actually occurred". This would change if a freak transaction occurred for a penny, or for $1B.

What it implies: "This is what the current stock is worth generally speaking, at this moment". This would not change with a freak transaction. The theoretical "true value of future cashflows" of owning a share is not technically related to 'the stock price'. In reality of course, 'market sentiment', meaning the price that the market is actively trading a stock at, should be influenced by the projected earnings of the company, so there is some relationship there.

For an actively traded stock, 'the implication' is a fair assumption based on 'the stock price'. However, every once in a while, there will be a drop in liquidity if buy or sell orders surge in a particular direction, 'drying up' previously posted orders on the other side. Here's an interesting example, for which I can't find a link, so apologies if my facts are off somewhat (the substance is generally indicative of what can happen):

There was a person who had put in a market order to 'buy x shares of Apple', when the last price traded was something like... $1k. But as his finger was pushing the 'buy' order, a bulk trader bought up all shares that were listed as wanting to be sold for anything less than like $1,100. But.... no one had put in a pending sale order at $1,101. The next standing order to sell shares was something like $10,000. So this person bought some shares at a cost of $10k, which was 10x more than the shares were worth. Seconds later, the next transaction occurred at 1,101 (or something like it), because the $10k price was a freak flash surge, and had no bearing on underlying value.

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  • I still don't understand your point about what it "implies" what's the mechanism that prevents freak transaction from having no bearing on the price?
    – user109855
    Jun 8, 2021 at 17:55
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    @user You are using the word 'Price' based on its most simple definition: "the last occurring transaction price", [though may have slightly different definitions depending on contexts]. The point is that, this definition is an indicator only. It doesn't naturally create any financial consequences. For example - it doesn't change how much your shares are 'worth' [because your shares are worth what the next person will pay for them, not what the last person previously paid for them]. There is no natural consequence of a 'freak price change'. Jun 8, 2021 at 18:07
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You need to understand market depth. Take this stock:

enter image description here

You will notice there are buyer & seller values. If you place a SELL order for 1000 "at market" you will automatically consume stocks from the seller column, i.e. you will get $26.89 for 582 and $27.04 for 418 triggering the last trade price to the the weighted average of those trades ($26.9527). Note that the resulting last trade price is not actually a value that would be realised in a trade. The same is true if you just sold 582 for $26.89 - the "latest trade price" is $26.89 you could not fill another order at that specific price until someone was prepared to buy it for that. Same thing with a buy. You will generate trades from any sellers until your order is filled.

If you specify a price, your order will fit into that table wherever the price puts it and participate in any fills if it fits any counterpart price (finds a buyer or seller at or above/below).
So in theory your $1 sell would briefly affect the price but in practice

a) You will still get the best price the market will offer you as described regardless of what you ask. (clarification - but no worse than you asked, so you'd get $26.89 even if you asked for $1)

b) Brokers/exchanges will not accept a price too far off the market. In your example the order would be unlikely to be accepted anyway.

In Australia at least, there is a market close & open auction which builds the open/close price by averaging out the early orders/last trades to avoid a skew on the close price due a rogue last minute order.

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    The numbers in your example doesn't make sense. There are bids at higher prices than the asks. Why haven't these trades already resolved? Jun 9, 2021 at 10:44
  • Very valid question, but this graph helps tremenfously to understand how trading shares actually works
    – Hakaishin
    Jun 9, 2021 at 15:23
  • @Stig Hemmer - Yes, it doesn't make sense. It's bad data. If you ignore the bad data on the sell side, it's a valid explanation. The OP should clean up the data. Jun 9, 2021 at 15:50
  • It's not bad data - it's literally a screen grab taken from my brokerage site. I got the perspective wrong (I always do because it's backwards in my mind as well). If you're a buyer, $30.03 is what you will pay. If you're a seller, $26.89 is what you'll receive. I'll change the commentary. Jun 10, 2021 at 0:00
  • @StigHemmer, I have fixed up the glaring error. Thanks for pointing it out. I got so caught up in the process of explaining that I got it the wrong way around! Jun 10, 2021 at 0:44
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From reading your question and your comments on the answers given, I suspect that you are concerned with someone manipulating the market by offering a stock extremely cheap.

So, let‘s say someone is shorting a stock. And then you offer that stock for 1$ which is usually traded for a 100$ dollars. Indeed everybody would jump at this offer and for an extremely short period of time the stock would actually be 1$. The thing is, that this price will immediately correct, because no one else will be selling the stock for that price. So the guy who was shorting won‘t be able to get the stock for that 1$ and if he did, he would actually make a great bargain as would anybody else buying something that is valued 100$ for 1$.

Analogously, you can‘t really drive the price up for a stock by buying a single stock for an amount way too high (say the share from before which we said to be 100$ for 10000$) even if everybody who owned the stock would happily sell it to you for that price. Anybody would sell it to you, because they know they can buy from someone else for close to 100$. And exactly the same way everybody would buy from you for 1$ because they know they can then sell it for close to a 100$.

In that sense: No you can‘t effectively modify the price of a stock by just selling a single share way too cheap or buying it way too high, even if for that single transaction the price would be way off.

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The other answers don't seem to have mentioned it yet, but this can happen: it's called a "fat finger trade", where somebody sells an asset for significantly lower than its market price. Usually assumed to be because of a typo. There are all sorts of safeguards supposed to prevent it, and it's probably impossible as a retail trader to make such a trade which appears on the market "tape" of transactions, but someone who is a broker directly connected to the market could probably do it.

Can cause a "flash crash" if it triggers a wave of automated sell orders.

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  • A fat finger trade (FFT) is one where human error includes incorrect information in an order (wrong price and/or wrong order size). A FFT to sell doesn't cause an asset to sell for significantly lower than its market price. It drives asset price down via the normal trading process as it sequentially takes out many of the higher bids on the order book, dropping price order level by order level. Each trade that occurs at a lower price is occurring at the market's current price which is dropping trade by trade. This is not the essence of the OP's question. Jun 9, 2021 at 15:44

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