The Bid
For any given asset, you will likely find that the number of people willing to pay a higher price is lower than the number of people willing to pay a lower price.
I can give you an easy example, would you be willing to pay $1 for a brand new Mercedes Benz? Most likely yes, because it is probably better than your existing car so you get a bit increase in value and all you have to give up is a dollar.
If you think about the other things that dollar can buy, it is not very much. Maybe a can of coke at best. Would you be willing to pay $250,000 for the same car? Probably not. You could buy many, many other things with that money. You might not even have that kind of cash available anyway.
So this represents what people are willing to pay, or "bid".
The Ask
On the other side of the coin, there is an exact symmetry in regards to selling the things you own. Would you be willing to sell your house for a dollar? Of course not.
And would you be willing to sell your car for $250,000? Probably.
So we get the reverse situation, with selling the higher the price the more willing participants there are, and the lower the price the less there are.
The Spread
If you were to plot this in a graph it would look something like this:
So what this graph is showing, is the blue bars are how many people are willing to pay a certain price. As the price on the y-axis goes up, the number of people willing to pay goes down.
Similarly, the red bars show the willingness to sell at increasingly lower prices is also falling.
The gap between the highest bid and the lowest ask is called "the spread" or "the bid-ask spread"
A large spread means that a trade is less likely to occur, because one of the buyers will have to change their mind quite heavily to meet the ask, or one of the sellers will have to drop their ask quite a lot to meet a buyer.
A low spread means that buyers and sellers have similar valuations and a trade is more likely to occur.
So how does a trade actually take place?
Market Makers
A Market Maker will basically keep a record of all the bids that have been submitted, as well as all the asks that have been submitted, and store it somewhat similarly to the graph above.
No trading is happening here, so eventually someone has to crack. Either one of the bidders will change their mind and increase their bid, or one of the sellers will decrease their ask.
Once the market maker has a pair of individuals who either agree on a price, or where the bidder is willing to pay more than is being asked, they will "execute" the trade. I.e. they will decide on a price value, then take that amount of money from the buyer and give it to the seller, whilst also transferring ownership of the stock from the seller to the buyer.
They then post this number as the latest "price" of the stock. So when you see the stock price moving along a chart like this:
You are simply seeing a history of the trades that have occurred.
Why do prices go up then?
Well it's really a case of who cracks first. If the bid-ask spread is say $1, then our most willing buyers and sellers still disagree on the price of the stock.
The buyer still wants to buy, but they can't find anyone to buy at the price they want to pay. So if that goes on long enough, eventually desperation might set in. If the desire for the stock is high enough, they'd be willing to increase their bid. This lowers the spread.
If they eventually increase the bid to what the seller is asking, then the trade will occur and the price moves up.
On the flip side, if no buyers moved their bids, you might find a seller that gets impatient and becomes willing to drop their ask in order to make the sale go through. If that happens, the stock price moves down.
So prices will go up when buyers are more desperate than sellers, and they will go down when sellers get more desperate than buyers.