Unit 1
Lesson 3: How Stock Prices Are Determined (And Why They’re Always Changing)
Objective
By the end of this lesson, you will:
Understand the basic principles of supply and demand in the stock market.
Learn the roles of market makers and exchanges in setting stock prices.
Distinguish between market orders and limit orders.
Introduction
Why Do Stock Prices Fluctuate?
Ever wondered why stock prices seem to have mood swings? One day, Apple’s stock price is up, and the next, it’s down. Is there a secret wizard behind it all? Not quite—it’s all about supply and demand. The more people want a stock, the higher its price goes. The less interest it gets, the more it drops. Easy, right? Let’s break it down.
Fun Fact: The largest single-day percentage drop in the U.S. stock market happened on October 19, 1987, also known as “Black Monday.” The Dow Jones Industrial Average fell by 22.6% in one day!
Main Content
1. The Basics of Supply and Demand
How It Works:
Demand Up, Price Up: If everyone wants a share of Duck Co., the price goes up because there’s only so much to go around.
Supply Up, Price Down: If Duck Co. decides to issue more shares, the stock price may decrease because there are now more pieces of the pie available.
Example:
Imagine a limited-edition pair of sneakers. Only 100 pairs exist, but 1,000 people want them. The price skyrockets because they’re rare. Stocks work the same way.
2. The Role of Market Makers and Exchanges
What is a Market Maker?
A market maker is like a matchmaker. They ensure that for every buyer, there’s a seller, and vice versa.
They set bid and ask prices:
Bid Price: The highest price a buyer is willing to pay.
Ask Price: The lowest price a seller is willing to accept.
What Happens on an Exchange?
An exchange, like the NYSE or NASDAQ, is the stage where stocks are traded.
Market makers step in to fill gaps if no immediate buyer or seller is available.
Why This Matters:
Without market makers, trading would be slow and chaotic.
They help keep the market liquid, meaning it’s easy to buy or sell shares quickly.
3. Market Orders vs. Limit Orders
Market Orders:
Definition: A request to buy or sell a stock immediately at the current market price.
Pros: Fast and easy.
Cons: You might pay more (or sell for less) than expected if prices change quickly.
Limit Orders:
Definition: A request to buy or sell a stock only at a specific price or better.
Pros: More control over the price you pay or receive.
Cons: There’s no guarantee your order will be executed if the market doesn’t hit your price.
Example:
You place a market order to buy Duck Co. at $10 per share, but demand spikes, and you end up paying $12.
You place a limit order to buy Duck Co. at $10, but if the price never drops to $10, the order won’t go through.
4. Why Do Prices Change Constantly?
Breaking News:
A major news story (good or bad) can send stock prices soaring or plummeting.
Example: Duck Co. announces a groundbreaking new product—its stock price jumps.
Investor Sentiment:
The market is influenced by how people feel. Optimism drives prices up; fear drives them down.
Earnings Reports:
Companies release quarterly earnings, showing how much money they’re making.
If Duck Co. earns more than expected, its stock price may rise. If it disappoints, prices may fall.
Activity:
Stock Market Scenarios
1. Scenario:
Duck Co. announces its CEO is retiring. What do you think will happen to its stock price? Why?
2. Write Down:
Your prediction.
Whether you’d buy, sell, or hold the stock based on this news.
Summary
Stock prices move because of supply and demand. Market makers and exchanges ensure trades happen efficiently, while different order types give you flexibility in how you buy or sell. Understanding these basics is the first step to becoming a confident investor.
Key Takeaways:
High demand raises stock prices; high supply lowers them.
Market makers keep trades flowing smoothly.
Market orders are quick but less controlled; limit orders are precise but slower.
Quiz Time!
1. What happens when demand for a stock increases?
A) The price goes down.
B) The price stays the same.
C) The price goes up.
2. What is a market maker?
A) Someone who creates new stocks.
B) A person who matches buyers and sellers in the market.
C) A type of stock exchange.
3. What is a limit order?
A) A request to buy or sell immediately at the current price.
B) A request to buy or sell only at a specific price or better.
C) A method for issuing new shares.
Answers: 1-C, 2-B, 3-B
Next Lesson
Lesson 4: Buying Your First Slice – How to Pick a Stock
Learn how to evaluate companies, analyze trends, and make your first investment with confidence.
Bonus Tip: Think long-term. Stock prices might swing wildly in the short term, but over time, solid companies tend to grow. Keep learning and stay curious—Invest with Ducky!