Your stock market questions answered

wolf · 04-28-2005, 01:19 AM

How come there is always a buyer for a seller, even when a stock is tanking miserably? Are there ever transactions that don't complete? (not including intervention by the SEC, say when they shut down trading on a stock that's that bad.)

What are the guys in the different color coats doing down there on the trading floor?

Catwoman · 04-28-2005, 03:16 AM

Ok I'm lost already.

Definitions please:

1. "open market"

2. "The little numbers change all the time, because thousands and sometimes millions of shares of a specific stock are traded in a number of different transactions. each transactions may have been for a different purchase price that can change based on supply/demand as influenced by market conditions."

What market conditions? Why does the amount of transactions affect the price? Why are there different purchase prices? How do they know? Who decides the prices? How can market conditions be measured that quickly and precisely? Are companies at all in control of supply and demand - is it based on annual performance or predictions?

I want to ask about the other stuff but this is enough for my little head right now.

Good idea for a thread btw.

Undertoad · 04-28-2005, 09:29 AM

I enjoy this stuff so I will write an analogy. Sorry folks, this is long.

I have a classic automobile, the "1948 Toadie" which I have in storage. It's kind of rare, and in excellent condition, and I bought it for 50000 shekels. It'll probably go up in value.

I can't really afford to have such a nice expensive thing, so I decide, I'm going to break it up and offer people an "investment" in my auto. I take 100 pieces of paper, and on each one I write a little contract that says the owner of the piece of paper also owns 1/100th of the car.

I take 51 of the pieces and put them in a lock box, and then I go and sell the other 49 pieces. Each piece is worth 500 shekels, since it's 1/100th of a 50000-shekel car.

Half of the buyers buy it for the investment, a few buy in because they like the idea of part-owning a classic car, a few buy in because their friend told them to... all have different motivations just like everyone walking down the street has different motivations.

Classic cars are coming into fashion, and it's not hard to imagine that the car will be worth 100000 sheckels in five years. In fact some people think it's worth 60000 sheckels right now! Boy what a great investment that would be - you'd double your money in five years - everyone wants in on that kind of action.

But it's risky, and not everyone HAS a few shekels to invest in a piece of paper. In fact, the worth of that piece of paper is going to be different to everyone. Some will feel it's not worth anything at all. Some will feel it's a trivial amount. Everyone is going to argue on the potential worth of the car, although actual car sales reports will tell you the current value fairly accurately...

Because the car's worth and future worth is in dispute, if you now go to sell that piece of paper, you'll find that some people think it's worth 300 and some think it's worth 800. The people who think it's worth 800 will not PAY 800, though, because the sellers also disagree on the worth. Some will sell for 450, because they suddenly need shekels to pay their mortgage. Some will not sell for 900 because they believe the investment is worth 1000 in 5 years and they have put the paper into their lockbox until then. But they do know what the last sale was for, and that's a good guideline for what the next sale is worth, because other people had to get together and agree on a price.

And that's the stock market, except that instead of buying 1/100th of a classic auto, you're buying 1/100000000th of General Electric. And because the stakes are so high, GE reports on its actual finances in tremendous detail all the time, and thousands of people are devoted to trying to figure out the actual worth.

What market conditions?

The value of classic cars, the number of people who have shekels to invest in something, the number of shekels available for investment, the number of people who are inclined to buy pieces of paper for investment purposes and the number of pieces of paper offered by other classic car owners. There are so many conditions that determine the value. The actual current value is whatever someone was willing to pay.

Why does the amount of transactions affect the price?

If people are interested in trading something, there is probably news about it. Let's say news comes out that there was a discovery of a mint garage full of 1948 Toadies. The actual current value of my Toadie falls dramatically! Everyone tries to sell their piece of paper. There will still be buyers at SOME price...

Why are there different purchase prices? How do they know? Who decides the prices?

That should be clear now - everyone has a different belief about the value and future value, so the price has to be agreed upon and it changes all the time.

How can market conditions be measured that quickly and precisely?

The actual price of the piece of paper tells you exactly what someone would pay for it so at that moment there is no mystery at all. Also, enormous effort is put into calculating market conditions because there is so much to be gained or lost.

Are companies at all in control of supply and demand - is it based on annual performance or predictions?

Once the pieces of paper go out, the companies can issue more paper... but they are responsible to the owners of those pieces of paper and in public companies the paper owners get together and exect a board of directors to run the company. Of course the paper owners are interested only in making the value of their paper increase. GE has no direct control over the paper that is out there. But they want to make the value of the company increase so that the value of the paper increases.

lookout123 · 04-28-2005, 09:45 AM

good analogy UT - interested in a new career? story sellers are the most effective and have the happiest customers. (and generally make the most$$$$$$ along the way)

Wolf - the people with different colored coats have different functions, but most of the action you see on the floor is the process of matching up buyers and sellers. only certain people (companies) are allowed to act as clearing houses for certain stocks and all trades to go through them (excluding extremely large institutional trades). that is as much as anyone who doesn't work on the floor needs to know. that - and it is all going to computers in the near future.

Catwoman - "the little numbers..." i think someone had asked about the TICKER. you see it on the news - it scrolls by showing the trade symbol followed by the price. there are different ticker levels available, but what you have access to is generally delayed 20 minutes rather than up to the second accurate.

04-28-2005, 01:19 AM	#1
wolf lobber of scimitars Join Date: Jul 2001 Location: Phila Burbs Posts: 20,774	How come there is always a buyer for a seller, even when a stock is tanking miserably? Are there ever transactions that don't complete? (not including intervention by the SEC, say when they shut down trading on a stock that's that bad.) What are the guys in the different color coats doing down there on the trading floor? __________________ wolf eht htiw og "Conspiracies are the norm, not the exception." --G. Edward Griffin The Creature from Jekyll Island High Priestess of the Church of the Whale Penis

04-28-2005, 03:16 AM	#2
Catwoman stalking a Tom Join Date: Apr 2004 Location: on the edge of the english channel Posts: 1,000	Ok I'm lost already. Definitions please: 1. "open market" 2. "The little numbers change all the time, because thousands and sometimes millions of shares of a specific stock are traded in a number of different transactions. each transactions may have been for a different purchase price that can change based on supply/demand as influenced by market conditions." What market conditions? Why does the amount of transactions affect the price? Why are there different purchase prices? How do they know? Who decides the prices? How can market conditions be measured that quickly and precisely? Are companies at all in control of supply and demand - is it based on annual performance or predictions? I want to ask about the other stuff but this is enough for my little head right now. Good idea for a thread btw. __________________ I've decided I'm not going to have a signature anymore.

04-28-2005, 09:45 AM	#4
lookout123 changed his status to single Join Date: Apr 2004 Location: Right behind you. No, the other side. Posts: 10,308	good analogy UT - interested in a new career? story sellers are the most effective and have the happiest customers. (and generally make the most$$$$$$ along the way) Wolf - the people with different colored coats have different functions, but most of the action you see on the floor is the process of matching up buyers and sellers. only certain people (companies) are allowed to act as clearing houses for certain stocks and all trades to go through them (excluding extremely large institutional trades). that is as much as anyone who doesn't work on the floor needs to know. that - and it is all going to computers in the near future. Catwoman - "the little numbers..." i think someone had asked about the TICKER. you see it on the news - it scrolls by showing the trade symbol followed by the price. there are different ticker levels available, but what you have access to is generally delayed 20 minutes rather than up to the second accurate. __________________ Getting knocked down is no sin, it's not getting back up that's the sin

04-28-2005, 09:29 AM	#3
Undertoad Radical Centrist Join Date: Jan 2001 Location: Cottage of Prussia Posts: 31,423	I enjoy this stuff so I will write an analogy. Sorry folks, this is long. I have a classic automobile, the "1948 Toadie" which I have in storage. It's kind of rare, and in excellent condition, and I bought it for 50000 shekels. It'll probably go up in value. I can't really afford to have such a nice expensive thing, so I decide, I'm going to break it up and offer people an "investment" in my auto. I take 100 pieces of paper, and on each one I write a little contract that says the owner of the piece of paper also owns 1/100th of the car. I take 51 of the pieces and put them in a lock box, and then I go and sell the other 49 pieces. Each piece is worth 500 shekels, since it's 1/100th of a 50000-shekel car. Half of the buyers buy it for the investment, a few buy in because they like the idea of part-owning a classic car, a few buy in because their friend told them to... all have different motivations just like everyone walking down the street has different motivations. Classic cars are coming into fashion, and it's not hard to imagine that the car will be worth 100000 sheckels in five years. In fact some people think it's worth 60000 sheckels right now! Boy what a great investment that would be - you'd double your money in five years - everyone wants in on that kind of action. But it's risky, and not everyone HAS a few shekels to invest in a piece of paper. In fact, the worth of that piece of paper is going to be different to everyone. Some will feel it's not worth anything at all. Some will feel it's a trivial amount. Everyone is going to argue on the potential worth of the car, although actual car sales reports will tell you the current value fairly accurately... Because the car's worth and future worth is in dispute, if you now go to sell that piece of paper, you'll find that some people think it's worth 300 and some think it's worth 800. The people who think it's worth 800 will not PAY 800, though, because the sellers also disagree on the worth. Some will sell for 450, because they suddenly need shekels to pay their mortgage. Some will not sell for 900 because they believe the investment is worth 1000 in 5 years and they have put the paper into their lockbox until then. But they do know what the last sale was for, and that's a good guideline for what the next sale is worth, because other people had to get together and agree on a price. And that's the stock market, except that instead of buying 1/100th of a classic auto, you're buying 1/100000000th of General Electric. And because the stakes are so high, GE reports on its actual finances in tremendous detail all the time, and thousands of people are devoted to trying to figure out the actual worth. What market conditions? The value of classic cars, the number of people who have shekels to invest in something, the number of shekels available for investment, the number of people who are inclined to buy pieces of paper for investment purposes and the number of pieces of paper offered by other classic car owners. There are so many conditions that determine the value. The actual current value is whatever someone was willing to pay. Why does the amount of transactions affect the price? If people are interested in trading something, there is probably news about it. Let's say news comes out that there was a discovery of a mint garage full of 1948 Toadies. The actual current value of my Toadie falls dramatically! Everyone tries to sell their piece of paper. There will still be buyers at SOME price... Why are there different purchase prices? How do they know? Who decides the prices? That should be clear now - everyone has a different belief about the value and future value, so the price has to be agreed upon and it changes all the time. How can market conditions be measured that quickly and precisely? The actual price of the piece of paper tells you exactly what someone would pay for it so at that moment there is no mystery at all. Also, enormous effort is put into calculating market conditions because there is so much to be gained or lost. Are companies at all in control of supply and demand - is it based on annual performance or predictions? Once the pieces of paper go out, the companies can issue more paper... but they are responsible to the owners of those pieces of paper and in public companies the paper owners get together and exect a board of directors to run the company. Of course the paper owners are interested only in making the value of their paper increase. GE has no direct control over the paper that is out there. But they want to make the value of the company increase so that the value of the paper increases.

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