Market Price

What is the Market Price?

Market price is the current price at which a product or a service can be bought or sold and therefore traded in the market place at a certain point of time. It exists in anything and everything we need in our daily lives – travel, food, work, and leisure.

There are two theories strongly supporting this concept. The first one is the economic theory which gives away the fact that the price at which forces of supply and demand meet is called a market price. The second one, the finance theory suggests the two prices, ask and bid, usually prevalent in stock exchangesFinance Theory Suggests The Two Prices, Ask And Bid, Usually Prevalent In Stock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more, the difference is termed as a spread or a margin. Only when a bid is equal to an ask, there is a defined market price.

Market-Price

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For eg:
Source: Market Price (wallstreetmojo.com)

Concept of Market Price

1 – Economic Theory

Market Price

2 – Finance Theory

  • It is the last price at which a security, usually called a share, is traded. Various parties – investors, brokers, dealers, and traders interact with each other to make this trade happen in the market. In simple terms, for a share to be bought or sold, there should be a buyer and a seller who should agree on the same price at the same point in time.
  • Buyers quote a bid, the price which they are ready to pay for a share; and sellers quote an ask/ offer, the price at which they want to sell the share. If it equals, the trade goes through and the share transfer happens subsequently. If not, there exists a difference between the two called a spread or a margin. Till that negates, or till the dealer/ broker agrees to pay the difference – trade does not go through.

Difference Between Market Price and Normal Price

Below are the key differences between the two –

Market PriceNormal Price
It is temporary – it can be more or less than the average cost of production.Normal price is permanent –usually equal to the average cost of production.
There exists an opportunity for supernormal profits if the price is more than the average cost of production. If it is less, there can be losses as well.There is only a normal profitNormal ProfitThe term "normal profit" is used when the profit is zero after accounting for both the implicit and explicit expenses, as well as the overall opportunity costs. It happens when all of the resources have been used to their full potential and cannot be put to better use.read more over the long run since the normal price is always equal to the average cost of production.
Supply stays constant in a very short period, while demand can change.In the long run, supply plays a key role in price determination.
It exists for all goods, even non-reproducible like arts, antiques.Normal price only exists for reproducible goods.
It may/ may not change frequently.Normal price remains stable over the long run.

Importance

In today’s world, prices are termed in some forms of currency as compared to barters or exchange systems prevalent in the older times. Prices can be replaced by vouchers, stamps, or bitcoins, but generally – the price of an asset or service is it’s worth in currency – digital or print.

Example

For a stock ABC, the bid and ask maybe $45.50 and $45.51. In that case, the trade would not happen. A trade-only takes place if a buyer interacts with a seller. To make that happen, there is a need for dealers and brokers. In the above scenario, if the buyer deems fit to increase the bid or the seller feels to decrease the ask to the respective prices, the share would trade or it will remain untraded.

Conclusion

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This has been a guide to What is Market Price. Here we discuss the concept of market price along with its importance and example. You can learn more about from the following articles –

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