I wrote this some time ago for a different website and decided to post it here to help anyone that’s interested in learning.
Instead of taking out a loan from the bank which has to be paid back plus interest, companies will offer stocks in the form of an IPO which stands for Initial Public Offering. This is the price they sell their initial stock to the public. The company in turn raises the money they need to move forward and continue growing. The stock market acts as a loan that does not need to be paid back. Unfortunately there is a price to pay in the form of transparency and public persuasion which also leaves their secrets open to rival companies.
What Moves The Market?
The short answer- You
Supply & Demand
After the shares have been sold to the public, it’s up to the public to make them move. When a stock rises it’s because more people desire it and are willing to pay more for it. You in turn become the market movers. The price does not change unless you make it move. A common belief for individuals that are not familiar with the market is that you purchase your stock from the company or banks. The fact is that you buy your stock from me, your neighbor, market players, big institutional traders, and market makers…… basically everyone.
How does it all work?
Market Buy Vs. Limit Buy
The Bid/Ask will have a big influence on the actual price you pay for the stock and what your portfolio is actually worth at any given moment.
When you want to purchase a stock, how much will you have to pay for it? The answer is not always the current market price. This is where Bid and Ask come in. Since the current price of the stock reflects the last trade price that exchanged hands, you may not be able to purchase it for that exact price if no one is offering it at that exact moment. How do we check this? You have to look at the market depth. This will show us the best bid price and best asking price.
Bid – When you place a limit buy, you’re really placing a Bid. For example, Let’s say you see a stock and it’s priced at $5.50 but you only want to pay $5.25 per share for it. You would then place a limit buy which tells your broker you are only willing to pay $5.25 per share for the stock. Your bid will then be listed on the left side of the market depth. The best bid ( the person willing to pay the most for the stock) will be listed at the top. This is who will buy your shares when you place a market sell. Sometimes you will get in between these two prices.
Ask– When you place a limit sell your really placing an Ask. This is the price you are asking for your shares. For example, You purchased your shares for $3 and wand to cash out at $6 then you would place a limit sell which tells your broker you want to sell your for no less than $6. Your asking price then goes on the right side of the list and patiently waits for the price to reach your target then executes the sale. The best asking price will be at the top (the person willing to sell their stock for the least amount) The colored bands on both the bid and ask side represent a group of prices that are the same so we can quickly look and see how many sellers are selling for the same price.
When you place a market buy, you are telling your broker that you are willing to pay full price for the stock. Full price is usually the best asking price. When buyers are aggressive and paying full price for a stock they are removing the shares from the ask side causing to jump to its next price level depth.
The colored bars on the very top represent every sale. When the bar is green then a buyer has paid full price and when a bar is red then a seller has dumped their shares at bid price. Here we see a spike in uranium sales. Although looking at the market depth I can see two sellers have listed 11,000 each at the $.80 range. In order for the price to move above $.80 then everyone needs to buy up these shares. Sometimes these shares are held by market makers who are constantly changing the price of their bid according to demand. And sometimes they work both sides of the spread. The green numbers on the right of the depth chart represent the time and sales window. Every time a sale is made then it will show up here along with the time in white. Just like the colored bars on top these numbers are colored according to the sale type. Green= Market Buy and Red= Market Sell…….. Easy enough to remember right?
When you place a market sell you are telling your broker that you are willing to dump your shares at whatever price. This is usually the best bid price. When we see a lot of sellers dumping their shares for the bid price we see the price of the stock drop.