Comprehension
Learning the Stock Market
The fresher the fish, the better the price at the market. The "stock market" is just that- a huge "market" where stocks are traded by many different vendors. Similar to the way other things are traded- like fish or vegetables at the old-world market, or cows at the cattle auctions- stocks are traded "at auction". Prices are determined by supply and demand- by sellers and buyers willingness to buy or sell at a certain price. As demand goes up, the price goes up, and so on.
Imagine, over 100 years ago, brokers literally shouting, "I have 100 shares of Pacific Railroad for sale, how much will you offer me?" If a broker had an order to buy some stock he would shout "Someone sell me 100 shares of Pacific Railroad! Who has the best price?" You've probably seen some of that happening- in more modern times- in film clips of the Chicago Board of Trade where wheat, corn and pork bellies are bought and sold. Market trading is more organized now. Computers do the shouting.
Brokers arrange for the actual trades (isn't "broker" a funny name for someone that handles your money). A broker is someone who sells stocks for a dealer. Charles Schwab is a dealer. The dealer holds inventories of stocks and sells them through the sales person. The sales guy is the broker or the specialist. If a sell order comes across the computer at an attractive price, the dealer buys (through his agent, the specialist), and adds this stock to his inventory. The brokers, and specialists, using computers, bring the dealers and investors together.
What makes the price of a stock change? Companies are expected to earn profit. If profits increase, the stock price will likely increase. Even if investors think the earnings will increase, the stock price may go up. If good news comes out on a company, the price, and demand for the stock may go up. With bad news, the price and demand may go down. The price of a stock is even more dramatically affected when supply is very high or very low. It is not so uncommon for certain unscrupulous individuals to "create" news or other financial information, for the purpose of duping unsavy investors into creating a demand situation, into which, the unscrupulous-one "sells into" and makes an unfair profit. Investors beware.
There are several different prices:
• Opening Price is the first price paid after trading starts, usually when the stock exchange "opens its trading doors", usually in the morning. Sometimes, opening price is higher or lower than the closing price of the previous day (orders are placed overnight, and after stacking up, affect the demand- and, thus, the opening price.
• Closing Price is opposite- its the price of a stock when the market closes- the price "at the close".
• Ask price is the price you will pay for a stock (and is slightly more than the trading price because it includes a dealer "commission").
• Bid price is what the broker, or agent, will buy your stock for (and is slightly less than the trading price because it includes a dealer "commission").
• Spread is the difference between the bid price and the ask price.
If many buy orders come through the specialist, the price for the stock will be increased. If many sell orders come across the desk, the price will go down. Supply and demand drives stock prices. Lots of orders reduce the spread- thinly traded stocks have a higher spread.
Three Different Stock Exchanges:
There are several organized "exchanges" in the US that make up the stock market. They are the New York Stock Exchange (NYSE), the National Association of Security Dealers Automated Quotes (NASDAQ), and the American Stock Exchange (AMEX). For a company's stock to be "listed", or traded on a particular exchange, it must meet that exchange's requirements of profit, size, employees, and the like.
Penny Stocks:
You get what you pay for- not much. Many new investors are drawn towards the purchase of "penny stocks". Penny stocks, as a group, have little demand in the "market" With penny stock, even when there is good news about a company, who is going to buy the stock from you? Penny stock is rather like Ostridge meat- it may be a good product, but there is no market (demand) for it. The best fishermen sell the best fish.
