Share price and share price are used synonymously in the stock exchange. For the sake of simplicity, we will use the term stock price in the following.
Stock prices are calculated by the trading system on the basis of existing buy and sell orders. Basically, the share price consists of the relationship between supply and demand. On the Frankfurt stock exchange floor, specialists monitor trading; on the fully electronic Xetra® trading platform, this happens automatically. Share prices can change quickly and are subject to permanent change.
A classic mechanism: supply and demand as the basis for the share price
In general terms: The market demand indicates the willingness to buy certain goods, while the market supply indicates the quantity available at a certain price. These two factors are then used to determine the price.
The share price is determined in the order book
The order book, in which purchase and sale offers are compared for each security on the stock exchange, is central to determining the share price. In the past, the order book was a kind of notebook in which brokers quoted buy and sell orders; today this is done by computer systems. Each security still has its own order book. In floor trading, where traders support the process, the order book is closed and can be viewed by everyone on Xetra.
The prices are determined according to rules. The price at which most shares can change hands is determined.
An order book is very clearly structured. On the left are the purchase offers with the corresponding asking price, called limit. These are the prices at which market participants are currently prepared to buy a particular share. This column is called "bid" or "money". Here, the order with the highest limit comes first.
On the right are the offers to sell. These are the prices at which market participants wish to sell their shares. The column is called "Ask" or "Brief". Here, the order with the lowest limit is in first place.
This is how the order book works: An example
- a buyer wants to buy 100 shares with a limit of 202.30 euros,
- another buyer wants 300 pieces for 202,00 Euro and
- a third 100 shares at 201.90 euros.
On the selling side
- a seller to sell 100 shares at 202.50 euros,
- another 700 pieces at 202.80 and
- sell a third 80 shares at 203.10 euros.
In this example, the buy and sell sides do not match, so there is no execution. But if someone enters a new buy order and wants to buy 100 shares at 202.50 Euro, for example, he is the highest bidder for this share at this time, and his buy order meets a corresponding sell order. The result: the order is executed. In this case we speak of a "match" (from English "to match": fit, match). The order book is updated with each match. The current share price is now 202.50 euros.
If the demand is higher than the supply, the price rises. Active market participants who follow this may adjust the limits of their orders. The order book is updated accordingly - prices and market conditions are constantly changing. If supply is greater than demand, prices fall. Investors are prepared to sell their shares at increasingly lower prices. This does not happen in one movement, but in many small steps with individual prices. These price movements, called volatility, do not have to frighten investors. With the limits they protect themselves from unwanted surprises, you can find out more about this in Chapter 10.
You can gain an insight into the open order book for shares in the Xetra trading system at boerse-frankfurt.de.
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