n00b stock market questions

[BlahBlahYouToo]

1. what determines the price of a stock, short term?
stock prices fluctuate by the minute, rising and falling. is it supply and demand?
from what i've been noticing, it could be anything... news, current events, the weather.
for the long term, i've heard it was determined by earnings.

2. who are the "investors"?
finance news always uses the terms investors, for example: "Stocks opened lower Monday, the last trading day of the year, as investors awaited more housing data."
is it people who are buying the stocks (you and I from our keyboards on etrade)? day traders? individuals? corporations? the guys at the trading floor in wall street?

3. if you are trying to sell a stock you own, could you theoretically not be able to sell it if no one wants to buy it?
lets say some devastating news about a company breaks loose. it's bad news but not to the point where the company is going to go belly up. but you want to cut your losses and get out while you can so you attempt to sell your stock. is it possible that no one will want it and you're stuck with it?

4. volume, that's just how many shares changed hands in a day right?
if person A sold 10 shares to person B, that's a volume of 10?

to all, feel free to add additional questions as the answers have been very helpful :thumbsup:

 

[LuckyTaxi]

we need a finance forum! *nix forum isnt getting much traffic but they get one. not fair.

 

[JJChicken]

marked, ill reply tomorrow. yes we need a finance forum!

 

[KeithTalent]

Originally posted by: BlahBlahYouToo
1. what determines the price of a stock, short term?
stock prices fluctuate by the minute, rising and falling. is it supply and demand?
from what i've been noticing, it could be anything... news, current events, the weather.
for the long term, i've heard it was determined by earnings.

2. who are the "investors"?
finance news always uses the terms investors, for example: "Stocks opened lower Monday, the last trading day of the year, as investors awaited more housing data."
is it people who are buying the stocks (you and I from our keyboards on etrade)? day traders? individuals? corporations? the guys at the trading floor in wall street?

3. if you are trying to sell a stock you own, could you theoretically not be able to sell it if no one wants to buy it?
lets say some devastating news about a company breaks loose. it's bad news but not to the point where the company is going to go belly up. but you want to cut your losses and get out while you can so you attempt to sell your stock. is it possible that no one will want it and you're stuck with it?

4. volume, that's just how many shares changed hands in a day right?
if person A sold 10 shares to person B, that's a volume of 10?

1. It could be anything really as you stated. One of my mining stocks jumped greatly a while back because of some political change in Peru.

2. It is all of those you stated except for the last group because they are just facilitating the transactions for the investors.

3. Most definitely.

4. Yes.

KT

 

[LuckyTaxi]

hehehe, your name is Allen iverson. we ran him out of town here in philly

 

[Special K]

I'll add a couple of related questions:

1. How are the buy/sell prices determined? Does it work just like a live auction on the floor of the NYSE, or what? Is there some official announcer who then relays these "live" prices to the rest of the world?

2. Why would the same person or organization buying and selling large chunks of a stock have a large impact on the price? I have heard of high-performing funds collapsing because they have too much money and run into problems when they try to move into and out of positions. Why is that?

 

[JS80]

Originally posted by: KeithTalent

Originally posted by: BlahBlahYouToo
1. what determines the price of a stock, short term?
stock prices fluctuate by the minute, rising and falling. is it supply and demand?
from what i've been noticing, it could be anything... news, current events, the weather.
for the long term, i've heard it was determined by earnings.

2. who are the "investors"?
finance news always uses the terms investors, for example: "Stocks opened lower Monday, the last trading day of the year, as investors awaited more housing data."
is it people who are buying the stocks (you and I from our keyboards on etrade)? day traders? individuals? corporations? the guys at the trading floor in wall street?

3. if you are trying to sell a stock you own, could you theoretically not be able to sell it if no one wants to buy it?
lets say some devastating news about a company breaks loose. it's bad news but not to the point where the company is going to go belly up. but you want to cut your losses and get out while you can so you attempt to sell your stock. is it possible that no one will want it and you're stuck with it?

4. volume, that's just how many shares changed hands in a day right?
if person A sold 10 shares to person B, that's a volume of 10?

1. It could be anything really as you stated. One of my mining stocks jumped greatly a while back because of some political change in Peru.

2. It is all of those you stated except for the last group because they are just facilitating the transactions for the investors.

3. Most definitely.

4. Yes.

KT

Some additions/corrections:

1. Depends on how you're asking the question. Technical answer - market makers determine the price of a stock. The bid/ask quotes you see are the price to buy/sell from market makers (they vary from large broker houses like Goldman, Morgan, etc to small co's specializing in market making) and their job is to basically create a "balance" of buys and sells from the flow of orders. News, events, etc will cause investors to flood buy orders and in order to match the order flow market makers naturally raise the bid/ask to create an equilibrium.

2. The "guys at the trading floor" aka specialists are indeed "investors" also. They may not only be matching client orders but buying/selling from their own inventory if they feel demand will increase/decrease. Anyone and everyone buying and selling in the stock market is considered an "investor" and when the media refers to "investors" they are referring to the collective whole.

3. Yes, theoretically true, but there are checks in place in our markets where exchanges will suspend trading if there is pending news, imbalances, etc. After the news (or dust) has settled, trading will resume at the new valuation price market makers think the stock is worth.

4. Yes.

 

[JS80]

Originally posted by: Special K
I'll add a couple of related questions:

1. How are the buy/sell prices determined? Does it work just like a live auction on the floor of the NYSE, or what? Is there some official announcer who then relays these "live" prices to the rest of the world?

2. Why would the same person or organization buying and selling large chunks of a stock have a large impact on the price? I have heard of high-performing funds collapsing because they have too much money and run into problems when they try to move into and out of positions. Why is that?

1. most trading is electronic - the quotes you see are the best prices available to buy at or sell to that market makers determine.

2. When you move large amounts of money into a stock where shares are scarce, you will run up the price - i.e. there is always a price someone is willing to sell at. Same on the sell side, if there are no buyers price will drop accordingly to bring them back. It all depends on shares available for trading and the demand for the stock.

 

[dullard]

You have it mostly right, BlahBlahYouToo.

The price of a stock is always determined by supply and demand. Pretty much on any given day for almost any stock, someone is trying to buy it and someone is trying to sell it. The key is, can those buyers and sellers agree on a price? If they can agree on a price (or the brokers who actually do the trading for them), then the sale goes through. If a stock momentarilly has more sellers than buyers the price will likely move down until there are fewer sellers and more buyers. If the stock momentarilly has more buyers than sellers, the price will move up until there are fewer buyers and more sellers. In rare cases (small companies, penny stocks, major news, etc) there may be no buyers and you can't sell.

Since information can change in a split second and since the buying selling process is discrete (you generally can't sell a fraction of a share), the price will jump around as the transactions take place and as the information comes in. There is a lot of work being done now in software that will shave MILLI-seconds off the transaction time. If your software can get the news and buy/sell a millisecond before the rest of the investors hear of the news, you can make a huge profit.

This news could be weather, a statement from someone important, a news release from the company, a court decision, etc. On any given day, all kinds of news could happen that will affect most stock prices. However, on a long term look, stock prices usually aren't affected by those little bits of information. The long term price depends on investor's PERCEPTIONS about future earnings. Past earnings matter a lot because they affect perceptions, but past earnings are not the true long term determination of a stock's price. You are dealing with people's hopes and dreams for future high earnings and that is what ultimately determines a stock's price.

The term "investors" pretty much includes everyone who has invested money. That includes individuals with retirement savings, day traders, corporations and governmental organizations that invest money into buying stocks. However, in your example, they are using a more narrow definition of "investors". Generally retirement accounts don't change on the minute-by-minute news information (by law retirement accounts can't buy/sell during the day and can only buy/sell at the end of the day AND most people don't change their retirement plans based on this data anyways). Also, govermental organizations often are too slow to respond to the data. It really is the day traders and the large companies that pay attention to the data and are "awaiting data" to make a buy or sell. Note: the companies could be investing their own money, or investing your money (mutual fund companies for example) when they await data.

 

[alien42]

OP, read this wiki on MMs:

http://en.wikipedia.org/wiki/Market_maker

 

[KeithTalent]

Originally posted by: Special K
I'll add a couple of related questions:

1. How are the buy/sell prices determined? Does it work just like a live auction on the floor of the NYSE, or what? Is there some official announcer who then relays these "live" prices to the rest of the world?

2. Why would the same person or organization buying and selling large chunks of a stock have a large impact on the price? I have heard of high-performing funds collapsing because they have too much money and run into problems when they try to move into and out of positions. Why is that?

1. It's essentially an auction where an investor will decide which price they want to buy something for and the other investor will decide how much they are willing to sell for. The traders then try and match up with other traders who represent someone willing to meet that price. This is how it generally works for most stocks, though there are other facilitiesin place (market makers, etc..) for certain types of securities.

I'm not sure of the specific mechanism used to get the prices from the floor to the rest of the world, because we have not had a physical trading floor up here for ages. At some point (and relatively quickly) the traders relay the information to some sort of keypunch person or something.

2. Well there are various things at work and I think you are essentially asking two questions here. For the first part it really depends on the investor a lot of the times. For example if Warren Buffett started buying up major pieces of a company, people would take notice and say, hey, if Warren like it, there must be something going on. At the very least it gets people looking at the company, so more interest and buzz is created.

As for the second part, if you are a (or the) major shareholder of a particular company, it is sometimes more difficult to move that position for a couple of reasons, not the least of which is people asking the quesiont: why are they selling? I see people accumulate hundreds of thousands of shares of a company and they look great on paper, but if they actually tried to liquidate, well they would take a huge hit because nobody would pay what they were asking.

I hope that makes sense. Kind of busy at work here today, so I'm sort of just rambling a bit.

KT

 

[KeithTalent]

Originally posted by: JS80

Originally posted by: KeithTalent

Originally posted by: BlahBlahYouToo
1. what determines the price of a stock, short term?
stock prices fluctuate by the minute, rising and falling. is it supply and demand?
from what i've been noticing, it could be anything... news, current events, the weather.
for the long term, i've heard it was determined by earnings.

2. who are the "investors"?
finance news always uses the terms investors, for example: "Stocks opened lower Monday, the last trading day of the year, as investors awaited more housing data."
is it people who are buying the stocks (you and I from our keyboards on etrade)? day traders? individuals? corporations? the guys at the trading floor in wall street?

3. if you are trying to sell a stock you own, could you theoretically not be able to sell it if no one wants to buy it?
lets say some devastating news about a company breaks loose. it's bad news but not to the point where the company is going to go belly up. but you want to cut your losses and get out while you can so you attempt to sell your stock. is it possible that no one will want it and you're stuck with it?

4. volume, that's just how many shares changed hands in a day right?
if person A sold 10 shares to person B, that's a volume of 10?

1. It could be anything really as you stated. One of my mining stocks jumped greatly a while back because of some political change in Peru.

2. It is all of those you stated except for the last group because they are just facilitating the transactions for the investors.

3. Most definitely.

4. Yes.

KT

Some additions/corrections:

1. Depends on how you're asking the question. Technical answer - market makers determine the price of a stock. The bid/ask quotes you see are the price to buy/sell from market makers (they vary from large broker houses like Goldman, Morgan, etc to small co's specializing in market making) and their job is to basically create a "balance" of buys and sells from the flow of orders. News, events, etc will cause investors to flood buy orders and in order to match the order flow market makers naturally raise the bid/ask to create an equilibrium.

2. The "guys at the trading floor" aka specialists are indeed "investors" also. They may not only be matching client orders but buying/selling from their own inventory if they feel demand will increase/decrease. Anyone and everyone buying and selling in the stock market is considered an "investor" and when the media refers to "investors" they are referring to the collective whole.

3. Yes, theoretically true, but there are checks in place in our markets where exchanges will suspend trading if there is pending news, imbalances, etc. After the news (or dust) has settled, trading will resume at the new valuation price market makers think the stock is worth.

4. Yes.

I'm in Canada, and while things are generally the same, there are a few things that are different, so thank you for the additions/corrections.

For 3 though, there are many times where a suspension goes directly to a delisting without any recourse (except from insolvency precedings) for the investor.

KT

 

[Miramonti]

Originally posted by: BlahBlahYouToo
1. what determines the price of a stock, short term?
stock prices fluctuate by the minute, rising and falling. is it supply and demand?
from what i've been noticing, it could be anything... news, current events, the weather.
for the long term, i've heard it was determined by earnings.

2. who are the "investors"?
finance news always uses the terms investors, for example: "Stocks opened lower Monday, the last trading day of the year, as investors awaited more housing data."
is it people who are buying the stocks (you and I from our keyboards on etrade)? day traders? individuals? corporations? the guys at the trading floor in wall street?

3. if you are trying to sell a stock you own, could you theoretically not be able to sell it if no one wants to buy it?
lets say some devastating news about a company breaks loose. it's bad news but not to the point where the company is going to go belly up. but you want to cut your losses and get out while you can so you attempt to sell your stock. is it possible that no one will want it and you're stuck with it?

4. volume, that's just how many shares changed hands in a day right?
if person A sold 10 shares to person B, that's a volume of 10?

1. Price is determined by supply and demand at all times. Regardless of media reporting, most trading is done by profession institutions and trading firms who don't give a crap about economic numbers, only price disparity and movement predictions based on electronic algorithms. Most volatility that happens after national/global events happens by pro's who are simply predicting what the next people will do, and trying to get a jump on it. That's of course not always the case, but I'd say atleast 90% of a standard day's volume and volatility is independent of nat'l/global news, regardless of the clueless Bob Pisani's of the world attributing it to particular events and sentiments of a given day. The "%" estimate is my opinion tho.

2. "Investors" is again a misnomer most of the time. Day to day volatility and volume happens mostly from profession institutions and trading firms, and most of the trades are from these firms (trading against each other) doing arbitrage trades and market dynamic trades, and not 'investors' at all. After all, 'investors' are ones who have longer term positions that don't get in and out at every whim and price disparity - that's what traders and trading firms do.

3. Theoretically, there could be noone that wants to bid for a particular stock or instrument, but that will never happen. The market is inundated with trading professionals who will 'buy anything at the right price'. However, there are also primary traders who's role it is in most markets to always provide a bid/offer for the markets they represent (and are registered as such with the respective exchange.) On the NYSE, they are called specialists (an acronym for scam artists imo, but we won't go there here), on the nasdaq and other markets they are 'primary market makers' I believe, registered as such with the exchange to help provide liquidity as well as sort out the opening/closing price of the stock when there are 'market on open/market on close' order imbalances.

4. Yep, if you buy 10 shares, that's a volume of 10. If I buy 10 and then sell them, that's 20 added to the daily sum. Some markets tho are also traded up stairs and away from the exchanges, such as currencies, where you'll never see the total volume traded because banks and others etc. aren't always required to inform an exchange of the transactions.

 

[BlahBlahYouToo]

very informative, thanks guys.
and boo to the "investors" that turn the market down at the slightest hint of bad news.

 

[JS80]

Originally posted by: jjsole

Originally posted by: BlahBlahYouToo
1. what determines the price of a stock, short term?
stock prices fluctuate by the minute, rising and falling. is it supply and demand?
from what i've been noticing, it could be anything... news, current events, the weather.
for the long term, i've heard it was determined by earnings.

2. who are the "investors"?
finance news always uses the terms investors, for example: "Stocks opened lower Monday, the last trading day of the year, as investors awaited more housing data."
is it people who are buying the stocks (you and I from our keyboards on etrade)? day traders? individuals? corporations? the guys at the trading floor in wall street?

3. if you are trying to sell a stock you own, could you theoretically not be able to sell it if no one wants to buy it?
lets say some devastating news about a company breaks loose. it's bad news but not to the point where the company is going to go belly up. but you want to cut your losses and get out while you can so you attempt to sell your stock. is it possible that no one will want it and you're stuck with it?

4. volume, that's just how many shares changed hands in a day right?
if person A sold 10 shares to person B, that's a volume of 10?

1. Price is determined by supply and demand at all times. Regardless of media reporting, most trading is done by profession institutions and trading firms who don't give a crap about economic numbers, only price disparity and movement predictions based on electronic algorithms. Most volatility that happens after national/global events happens by pro's who are simply predicting what the next people will do, and trying to get a jump on it. That's of course not always the case, but I'd say atleast 90% of a standard day's volume and volatility is independent of nat'l/global news, regardless of the clueless Bob Pisani's of the world attributing it to particular events and sentiments of a given day. The "%" estimate is my opinion tho.

2. "Investors" is again a misnomer most of the time. Day to day volatility and volume happens mostly from profession institutions and trading firms, and most of the trades are from these firms (trading against each other) doing arbitrage trades and market dynamic trades, and not 'investors' at all. After all, 'investors' are ones who have longer term positions that don't get in and out at every whim and price disparity - that's what traders and trading firms do.

3. Theoretically, there could be noone that wants to bid for a particular stock or instrument, but that will never happen. The market is inundated with trading professionals who will 'buy anything at the right price'. However, there are also primary traders who's role it is in most markets to always provide a bid/offer for the markets they represent. On the NYSE, they are called specialists (an acronym for scam artists imo, but we won't go there here), on the nasdaq and other markets they are 'primary market makers' I believe, registered as such with the exchange to help provide liquidity as well as sort out the opening/closing price of the stock when there are 'market on open/market on close' order imbalances.

4. Yep, if you buy 10 shares, that's a volume of 10. If I buy 10 and then sell them, that's 20 added to the daily sum. Some markets tho are also traded up stairs and away from the exchanges, such as currencies, where you'll never see the total volume traded because banks and others etc. aren't always required to inform an exchange of the transactions.

2. Traders are technically still considered "investors"

3. I prefer to call specialists thieves. It's a legal way to steal money. Less of that happening today though compared to 10+ years ago.

 

[JS80]

Originally posted by: BlahBlahYouToo
very informative, thanks guys.
and boo to the "investors" that turn the market down at the slightest hint of bad news.

do you hooray them when they inflate prices at the slightest hint of good news?

 

[BlahBlahYouToo]

Originally posted by: JS80

Originally posted by: BlahBlahYouToo
very informative, thanks guys.
and boo to the "investors" that turn the market down at the slightest hint of bad news.

do you hooray them when they inflate prices at the slightest hint of good news?

no because there hasn't been much of that happening in the past couple of months other than the interest rate cuts a few months back.
but then agian, i'm a noob so what do i know...

 

[dullard]

Originally posted by: BlahBlahYouToo
very informative, thanks guys.
and boo to the "investors" that turn the market down at the slightest hint of bad news.

Why?

I hooray them because then I can buy the stock for a cheaper price.

For most current investors if the stock market goes down right now, they will be far wealthier in the long run. The daytraders that you boo and those who are in retirement may be harmed, but I suspect you are neither.

 

[BlahBlahYouToo]

Originally posted by: dullard

Originally posted by: BlahBlahYouToo
very informative, thanks guys.
and boo to the "investors" that turn the market down at the slightest hint of bad news.

Why?

I hooray them because then I can buy the stock for a cheaper price.

For most current investors if the stock market goes down right now, they will be far wealthier in the long run. The daytraders that you boo and those who are in retirement may be harmed, but I suspect you are neither.

those that are in long term investments basically, like mutual/index funds/401k, no?

 

[dullard]

Originally posted by: BlahBlahYouToo
those that are in long term investments basically, like mutual/index funds/401k, no?

Those are the people who will benefit. When they make their next mutal fund or index fund purchase for their 401k (or similar retirement plan), they will get far more shares since the price moved lower. Then in 10, 20, 30, or 40 years when they retire, they have more shares to sell and thus they have more money. The long term price (ie when they retire) is not affected by this temporary move down, thus they can only gain when the stock market goes down now.

Most people with a 401k should hope the stock market goes down (unless they are about to retire).

Case 1: Invest your $200 401k money into a stock. Buy that stock at $10/share, and you get 20 shares. 30 years later when you retire it is $175/share, you now have $3500.

Case 2: Invest your $200 401k money into a stock. That stock was just beaten down by the people you boo. Buy that stock at $8/share, and you get 25 shares. 30 years later when it is $175/share, you now have $4375.

Which would you rather have from each of your 401k contributions? $4375 (because of the price going down now) or $3500?


Question #2: when you do retire and need to sell, do you want people there to buy it from you? Those are the people you just booed.

 

[Miramonti]

Originally posted by: BlahBlahYouToo

Originally posted by: JS80

Originally posted by: BlahBlahYouToo
very informative, thanks guys.
and boo to the "investors" that turn the market down at the slightest hint of bad news.

do you hooray them when they inflate prices at the slightest hint of good news?

no because there hasn't been much of that happening in the past couple of months other than the interest rate cuts a few months back.
but then agian, i'm a noob so what do i know...

Understandable - that's what someone might conclude from listening to nat'l/global headlines, and the 'storyteller' newscasters who sound more interesting to listen to when they share share negative news.

But all you need to know is value...and if a discount is created by bad news and people jumping on the bandwagon of fear, then like Dullard said, embrace it as an opportunity to buy a good stock or fund very low.

Truth is, nat'l/global headlines rarely have an immediate impact on a company's foreseeable earnings potential, yet they are often followed by dire predictions or overreactions.

Company specific headlines are different tho...they often represent an immediate impact on a particular company's value, and in these circumstances, their resulting volatility needs to be respected more.

 

[BarneyFife]

Originally posted by: LuckyTaxi
we need a finance forum! *nix forum isnt getting much traffic but they get one. not fair.

Yup. Would love a finance forum.

 

[IHateMyJob2004]

Originally posted by: BarneyFife

Originally posted by: LuckyTaxi
we need a finance forum! *nix forum isnt getting much traffic but they get one. not fair.

Yup. Would love a finance forum.

Not popular enough of a topic and they exist at non-tech sites. I've already tried to get one here ... but that is the simple fact.

 

[sjwaste]

1. Short term, the offers on the buy and sell side determine it. Placing a limit order, for instance, would be one of these offers. Market orders are liquidity takers, though, so they transact at whatever is the prevailing price at that time (for instance, if a market buy comes in and the lowest sell limit is $7.50 a share, you'll buy at that price, and the next lowest sell order moves up to be filled).

2. Investors are anyone buying/selling, but usually refers to large groups or institutional investors when the media talks about "investors waiting for x and x announcement".

3. It depends. If its a bulletin board stock, definitely. If it's a listed stock, probably not, since the specialist trading it has a duty to maintain flow in the market, so he'd probably fill your order out of his inventory or buy it from you to maintain that.

4. Yes.

 

[sjwaste]

Originally posted by: Special K
I'll add a couple of related questions:

1. How are the buy/sell prices determined? Does it work just like a live auction on the floor of the NYSE, or what? Is there some official announcer who then relays these "live" prices to the rest of the world?

2. Why would the same person or organization buying and selling large chunks of a stock have a large impact on the price? I have heard of high-performing funds collapsing because they have too much money and run into problems when they try to move into and out of positions. Why is that?

1. All exchanges are required to share data, so your order has to route through to the best price. That price is usually determined by the open orders on the buy and sell side. On the floor, its sort of the same thing, except a person is filling the orders. It's usually called a specialist, and they're responsible for a number of stocks (more if volume on them is lower, less or even one if its a high volume security).

2. If you try to acquire or liquidate a large position, its going to change the price. For instance, if I'm selling a million shares (assume valuable shares of a valuable company), I might be able to match with a buy order on the first 1000 at X price, 2000 at X-n price, and on down. You're usually not going to match a large order with another opposite order in full. Your sale, in this example, will take your million shares and probably sell them to 1000 different people (with different offers on the books).