What is Market Price?
The market price is the current price an asset can sold or purchased for. It is mutually agreed upon by buyers and sellers.
In economic theory, the market price is determined by supply and demand. For the most part, this also holds true in financial markets.
Market Price in the Stock Market
In the stock market, as in any other market, buyers and sellers determine the market price.
A stock trading on the market has two prices quoted: the bid price and the ask price. The bid is the price that buyers are willing to pay for a stock.
The ask is the price sellers are willing to sell it for. Because buyers want lower prices and sellers want higher prices, the bid is always lower than the ask.
If the bid and the ask converge on the exact same number, a transaction occurs. When a gap exists between the bid and the ask, it is referred to as the “bid/ask spread.” The smaller the spread, the closer buyers and sellers are to agreeing on a price.
The above table shows how stocks are quoted in the market.
For Facebook (NASDAQ: FB), purchasers are willing to buy the stock for $190.00, the bid, and sellers are willing to sell at $190.01, the ask.
The spread between the bid and the ask prices is $0.01. The market price in this example is the number closest to the last traded price. So if the last trade in Facebook stock was at $189.99, then $190.00 is the market price.
Price in Liquid and Illiquid Markets
A market is liquid if there are many buyers and sellers and a fair price can be quickly determined. The stock market is very liquid because the price can be quickly found and transacted on.
It is easy to buy shares in a large stock like Apple (NASDAQ: AAPL) because buyers and sellers trade billions of dollars of Apple’s stock every day.
Because Apple is liquid, the market price is easy to find; just look at where the last trade occurred and the current bid and ask prices.
In less liquid markets, determining the prevailing price is more challenging. Referring back to the table, Facebook (NASDAQ: FB) and Apple (NASDAQ: AAPL) are larger companies that see their stocks trade more frequently, and thus they have tiny bid/ask spreads.
Miller Industries (NYSE: MLR) is a small company that does not trade as frequently. There are fewer buyers and sellers and, as a result, the bid/ask spread on Miller stock is much wider.
For Miller Industries, it’s less clear where the market price is—is it $21.24, $21.75, or somewhere in the middle? If the last transaction occurred at $21.50, then $21.50 would be the market price.
Finally, there is the extreme case of companies that don’t trade at all.
What is the market price for a privately held company?
It’s still the price that a buyer and seller would mutually agree on, even if the transaction is hypothetical. However, because there is no quoted liquid market, there will be some negotiating involved to come to that agreed-upon price.