What Determines the Price of Stock?

Discussion in 'Ask any question!' started by Joseph Perl, Jun 11, 2017.

  1. Joseph Perl

    Joseph Perl New Member

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    Hello. I am new to investing and about to open my first online stockbroker account. I'm reading a book right now that covers some basics on choosing stocks, how to buy and sell, etc.

    One question I had was what determines the price of stock, and, specifically how supply and demand plays a role. In looking at the online websites for buying and selling stock, it looks like you just place a bid for a certain dollar amount and wait for someone to sell it for that amount. Suppose I bid for a stock at $5 and there are ten other sellers that want to sell at that price (I know in a real word situation there'd be a lot more sellers, I'm just using easy numbers for this example). If I am the only one wanting to buy that stock, and if I knew ten people wanted to sell it, the sellers would compete against each other until the lowest price was reached. This is no different than buying any other asset where the number of sellers exceeds the number of buyers. With an online brokerage account, though, from what I understand, It will just automatically purchase the stock for me at $5 as soon as one of those sellers clicks "sell" on their end. Those ten sellers don't have to really compete for price, it's just whichever one of them clicks "sell" faster will have sold the stock to me. On the flip side, if I want to sell at $5 and ten people want to buy, they wont need to compete to get the sale by bidding higher amounts- it will just sell at $5 to the first person who clicks "buy".

    Is there something I'm missing here?
     
  2. Jrich

    Jrich Well-Known Member

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    Youre pretty close... id recommend looking up "market makers" and learn as mych as you can about their role and how they opperate

    Basically they are the middle men.... they constantly hold an inventory of shares so that anyone can buy or sell from them at any instant without having to wait for a match on the other side

    They also control the bid and ask prices to maintain their inventory, and, you know, make a profit

    Supply and demand moves the market, but it goes through market makers to do so
     
  3. Joseph Perl

    Joseph Perl New Member

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    Thank you Jrich. I will check out market makers. But how can it be that any can buy or sell without waiting for a match? Doesn't the actual owner of the stock, and not the middle man, need to first agree to sell?
     
  4. Jrich

    Jrich Well-Known Member

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    The middle man technically is an owner

    He always has shares in his account, and he will buy or sell regardless of price... cause he makes his money off the spread (difference between bid and ask)... the more he buys and sells (volume) the more he makes.... he doesn't care if price goes up or down

    But... if he gets over run with buyers, he has to find more sellers so his inventory doesnt go dry..... if he bids up (raises the price) he can tempt more sellers

    And vice versa... if hes over run with sellers, then hes taking on more shares than he wants.... so he can drop the ask (lower the price) to tempt more buyers

    See... Supply and demand..... more supply (sellers) price goes down..... more demand (buyers) price goes up
     
  5. Gray Wolf

    Gray Wolf Well-Known Member

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    Not sure I buy into the idea that all sells and buys go through a market maker as this conversation seems to imply. Stocks are traded on the exchange in open market. While there are "market makers" in play they are not the dominant force. Buying is very simple. You decide what you want to buy ad you submit a buy order at the price you are willing to pay or you can choose you want in at whatever the market price is. The seller does the same. They submit an order at whatever price they are willing to sell at. They also can choose to accept whatever the market price is. If a buy order comes in and no one is selling it sits and waits That is where the bid is established. Opposite for the seller, no buyer's, the ask price is established. Those are visible on the exchange and the buyer can decide to wait or change the order to the ask. If buyers are raising bid's to meet the ask the price starts to rise and if sellers lower to the bid the price starts to drop. Buyer's and sellers are monitoring this activity and choosing when they want to enter. Now a days, a lot of this is done through automation using algorithms. Market makers can attempt to influence the price by adding buy/sell orders to the mix to attempt to influence the direction. I do however refuse to believe that the entire market is being manipulated by puppet masters and if people do believe that I'd question why they might want to play under those rules.
     
  6. Jrich

    Jrich Well-Known Member

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    @JerryM

    I thought i had that right... not to argue, contrarily if i got it wrong id like to know

    From what ive read, market makers/specialists keep the market orderly by providing liquidity..... they hold shares as a "buffer"... not for price, but for trade size

    Ideally, they just match buyers with sellers... and by "they", i mean their computers..... but when order sizes dont match, theyre "laundered" through the inventory... without them, there would be chaos.... people stuck in trades, or excessive partially filled orders

    Im the perfect example... since im staring out with a small amount of capital, i only trade odd lots.... 52, 38, 24, 13 shares ect..... i usually place market orders, and im usually filled instantly, buy or sell

    So what are the odds that someone else out there is selling exactly 52 shares at the exact second im buying 52... and that the same thing happens at the exact moment i decide to sell

    My understanding was that a market maker absorbs my odd ball, annoying order out of and back into their inventory....... am i off on this??
     
  7. Joseph Perl

    Joseph Perl New Member

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    Thank you for the responses and sorry for my delay in responding- been away for a few days.

    JerryM you said "If a buy order comes in and no one is selling it sits and waits. That is where the bid is established...If buyers are raising bids to meet the ask the price starts to rise and if sellers lower to the bid the price starts to drop."

    I thought that on these online trading sites once someone places a sell order, the first person willing to buy at that price gets it. Are you saying that an auction is held for the stock similar to what happens on EBAY? If so, does the seller choose how long the bidding will take place? If this is what's going on, I can better see how supply and demand comes into play.

    You also said that they can choose the market price to sell at. What is the distinction between the "market price" and the price that any given individual sells a share of stock at, and what's the difference between how market price and the actual sale price are determined?

    Jrich, from what you described the market makers are like middle men. In other kinds of markets, I can see how middle men like that would be necessary (e.g. they have connections with people who need that specific product, and the buyer needs the middle man to make those connections). In the stock market though, it's done online, so it seems there is no need for a middle man and the "spread" costs associated with going through a market maker. I must be missing something?- although I can see how they'd be helpful in the example you gave when you want to sell a specific number of stocks.

    Another question is how is liquidity guaranteed in the stock market? Why can't there simply be days when certain people can't sell there stock because there aren't enough people who want to buy?
     
  8. Jrich

    Jrich Well-Known Member

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  9. Gray Wolf

    Gray Wolf Well-Known Member

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    The thing is the way the market usually works is quite fast. Things don't move that slow if you deal with main stream stocks that have liquidity on a normal basis. The actual bidding is done with an order to buy or sell. One of my trading rules is that a stock has to have an average over 30 days of 250,000 shares or more per day. And if I am doing options I want stocks that have average trades of 500,000 per day. This insures for the most part that buy and sell orders will pretty much be there all the time and usually with a bid / ask price of 1 penny spreads. The only way you would slow the transaction down would be to submit a buy order underneath the bid and wait to see if the price drops. Orders are normally good for that trading day unless you specify it is "good til canceled". But typically when buying between the bid and ask the transactions fill quickly. I often times just do market orders which execute very quickly when submitted. A penny or 2 that I might save trying to get a lower price then the ask is usually not worth the aggravation on buying what I want since I don't day trade.
     
  10. Joseph Perl

    Joseph Perl New Member

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    Does the seller know in advance how many buyers want to buy the stock at a certain price? If so, can the seller use that information in setting the ask price (I'm assuming "ask" means the price the seller is asking for, and bid is the price the buyer is looking to buy for?)? If I know that many people want to buy a certain stock at $5 per share, I will set the ask price at more than $5. Also, is there a rule for how long the bidding takes place? Is it like an auction with the "going once, going twice" idea?
     
  11. Gray Wolf

    Gray Wolf Well-Known Member

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    Yes, if you have access to level II quotes you can see the number of lots sitting at different bid and ask prices. Without level 2 you can still see the current bid / ask in most stock summaries. Another thing that I am not familiar with and don't use much is called Time and Sales. That is a list of the most recent transactions and how fast they are being processed.
     
  12. Joseph Perl

    Joseph Perl New Member

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    Thank you. If there is a good book you or anyone could recommend on the mechanics of all this I'd appreciate it.
     
  13. Ciao (Sheppy)

    Ciao (Sheppy) Well-Known Member

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    hiya Joseph check this
     
  14. Joseph Perl

    Joseph Perl New Member

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    Thank you Ciao. That's a helpful video.
     

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