What You Should Know About The Stock Market

Hi Rodrigo, great question. As far as I know, all stock motion is the result of changes in bids and asks, just like changes in price on eBay is the result of incoming bids.

However, there can certainly be (and most certainly are) automatic triggers that people set up – many firms let you do this. For example, if you own stock, you can set a trigger (limit order) to sell the stock when it reaches a certain price, such as $45. So, the impact of many limit orders may make the motion of stock look “automatic”, sort of like people automating auctions on eBay. But at the end of the day, it’s all bids and asks.

-Kalid

Great article Kalid. However, I’ve been itching to find something out regarding the volume of trades. How exactly does this work? For instance, let’s say someone bids for an arbitrary number of shares, say 123 shares at a specific bid price. How is the transaction made if someone else has 150 shares they want to sell off at a price close to the bid? Does the transaction vary with the degree of volume? ie. 3 digit volume isn’t so much a factor as it would be for someone trading in volumes of 5 or 6 digits?

Hi Kabir, great question. As far as I know, if you are trying to sell “odd lots” (non-round amounts of shares, like 123) then you need to find buyers who are willing to buy an arbitrary number. There are some postings like “fill or kill” where you try to complete the entire order, or none at all. So, it would depend on the availability of buyers and whether they had specified that they’d accept an odd number of shares. I think it may depend on the price of the share; Google shares are relatively expensive, so selling fewer or odd amount of shares is probably more common than Microsoft shares.

it was excellent i really enjoyed reading

Excellent. The idea of “using up” bids and asks was a huge ah-ha for me. I appreciate how concise your explanations are.

@ishan: Great, glad you liked it.

@Ticker Tape: Thanks for the comment! It’s really helpful to know what part made it click, so I get an idea of how to structure future posts.

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Thanx a lot! You’ve demystified a whole lot for me. Very easy to understand. (anyone who can’t explain something simply, doesn’t understand it well enough)

@hawifash: You’re welcome! That’s one of my favorite quotes :).

I am always very skeptical when it comes to the stock market. After visiting your site, I fell though I can do it. Now, I understand the difference between BIDS and ASKS.
What’s your recommendation for someone like me who wants to invest in the stock market?
Where do you think I can find more information about the stock market?

@Arry: I’m really not qualified for financial advice, but for books two ones I’ve seen recommended are “A random walk down wall street” (Malkiel) and “The intelligent investor” (Graham).

Hey Kalid…Great Articles…I like the way you explain stuff :-)…where do I find your complete profile ?

Great well explained article. I’m always amazed by how little people actually know about the stock market and will have false impressions of it. Or how it is on the news every night, and people just seem to glaze over with dis-interest or just don’t understand even the basics of the market.

@mike: Thanks – I didn’t realize how little I understood until I started asking myself if I really knew how it worked.

Hi Kalid, I like your explanation very much, yet since there’s already so much praise about that I’ll just leave it here.

I have a question though. According to your explanation of how the stock price changes, it seems the presence of limit order together with a market order is a premise for the price to change. What happens, I wonder, if say there are no limit orders being placed at all? If market orders on one side exhaust the those on the other side, would it lead to a change in price by itself?

In your example above, if after all matching market orders have been cleared at 200
there are still some selling market orders remaining, will they sit there to wait for the next bid at 200 or will the clearing price automatically goes down to try if it can be cleared at 199? I know in reality it is highly unlikely but I just want to point out that it seems puzzling how the market price can change without limit orders. Thanks.

[…] What You Should Know … the stock market — but few know why it works. Were you … your order gets added to the bid queue (similar for asks). If you need to … great question. As far as I know, all stock … No Comments » […]

Hi Kalid, I read your replies to the questions and I think you are quite generous in giving answers to people. I have few questions as well, I hope you will give me simple answers:
How do we know what will be the market tomorrow or how market will react tomorrow? It will go up or down? Are there any indicators that help us to determine the next day market movement? Some times market opens and straight away goes down but then later it goes up and closes up. Sometimes market opens with up signs but later on it goes down. How to determine that? Please don’t mind as purposely I am not typing my email address (later I will).
Best regards
JM

Thanks Kalid :slight_smile:
JM

Hi JM, how I wish I knew :). People use various “trend” signals (moving averages, trendlines, etc.) but it’s a black art.

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