The market price is the current price at which a good or service can be bought or sold in the marketplace. In the context of financial markets, the market price refers to the most recent price at which a security (such as a stock, bond, or derivative) was traded.
In theory, the market price is determined by supply and demand. If a product or security is in high demand and low supply, the market price tends to increase. Conversely, if there is a low demand and high supply, the market price usually decreases.
In practice, the process is more complex, especially in financial markets. For securities like stocks, the market price can fluctuate rapidly based on a wide range of factors including the company’s financial performance, economic indicators, investor sentiment, geopolitical events, and more.
It’s important to note that the market price of a security doesn’t necessarily reflect its intrinsic value, which is the present value of the future cash flows expected to be generated by the security. There can be times when the market price is significantly higher or lower than the intrinsic value, which can present opportunities for investors.
Example of Market Price
Let’s consider an example from the stock market.
Suppose you are interested in buying shares of a company named TechCo. You log into your online brokerage account and search for TechCo’s current stock price. The platform shows that the last trade of TechCo’s stock was at $50 per share. This $50 is the market price of the stock.
If you decide to buy shares of TechCo, you would expect to pay around $50 per share, although the actual price you pay may be slightly different due to factors such as market volatility and the type of order you use (for example, a market order versus a limit order).
Later in the day, TechCo announces positive earnings results that exceed analysts’ expectations. In response to this news, more investors start buying TechCo’s stock, which increases the demand for the shares. As a result, the market price of the stock rises to $55 per share.
On the other hand, if TechCo had announced disappointing earnings, more investors might have started selling their shares, increasing the supply in the market. This could have led to a decrease in the market price.
This example illustrates how the market price of a stock can change in response to new information. It also highlights the principle of supply and demand: when demand for a stock outstrips supply, the market price tends to rise, and when supply exceeds demand, the price tends to fall.