As the saying goes, 'it takes two sides to make a market'. The two sides concerned are:
The relationship between them powers the movements in market prices. Let's look at how that works.
Suppose you were buying a car – you'd look for the lowest price on the model you wanted. And if other buyers were thin on the ground you might strike a good deal. On the other hand, if you were trying to bag a rare and sought-after vehicle, you might have to pay the seller a high price.
In the same way, the balance of demand from buyers and supply from sellers influences prices in financial markets.
How levels of supply and demand move prices
A company releases poor annual results
Disappointing figures will probably make the share unattractive to investors. The resulting selloff will increase supply, causing the price to slump.
Political instability in an oil-producing region threatens supply
Fears of a shortage of oil to meet world demand are likely to drive up the commodity's price.
The Japanese government announces policies designed to depreciate the yen
The yen will tend to become less attractive to investors, increasing relative demand for the dollar and lifting the price of the USD/JPY pair.
When you look at a quote for a financial asset, you'll generally see not one but two prices:
The ask price is also known as the 'offer price'.
In a quote, the lower figure shown is normally the bid price and the higher is the ask price.
The gap between the bid and ask prices occurs because buyers and sellers often have contrasting views about the value of an asset:
The difference between the two prices is known as the 'spread', and also as the 'bid-ask spread' or 'bid-offer spread'.
The spread may also incorporate a broker's fee for handling the trade. The broker quotes clients a price slightly lower than the fundamental bid price or slightly higher than the ask price, keeping the difference to cover its costs.