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Matching Supply with Demand
How is a stock price set on the AZX? In this simplified example, five buyers and five sellers exist for a stock, all posting different prices at which they're willing to buy or sell 10,000 shares of stock. The price that clears the market, executing the maximum amount of shares, is 30 1/2, which moves 20,000 shares. Any other price would not bring equilibrium between supply and demand. For instance, at 30 3/8, there are three buyers, or demand for 30,000 shares, but only one seller, with a supply of 10,000 shares. With the price at 30 1/2, sellers posting prices above 30 1/2 keep their stock, and buyers below that price go away empty-handed. But some sellers, such as those with orders at 30 3/8, get a higher price, and buyers who input orders of 30 5/8 get their order filled for 1/8 less, at 30 1/2. On traditional exchanges, a middleman, and not investors, might profit from that 1/8 spread. BUYERS PURCHASE AMOUNT TOTAL PRICE (SHARES) DEMAND 30 1/8 10,000 50,000 30 1/4 10,000 40,000 30 3/8 10,000 30,000 30 1/2 10,000 20,000 30 5/8 10,000 10,000 SELLERS SALE AMOUNT TOTAL PRICE (SHARES) SUPPLY 30 3/8 10,000 10,000 30 1/2 10,000 20,000 30 5/8 10,000 30,000 30 3/4 10,000 40,000 30 7/8 10,000 50,000 DATA: BUSINESS WEEK
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Updated June 15, 1997 by bwwebmaster
Copyright 1997, by The McGraw-Hill Companies Inc. All rights reserved.
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