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Excellent post and discussion Khalid. Lots of AHAs for me … Could you please tell me what software you used to produce the illustrations?
Hi imbong, glad you liked it – I used PowerPoint 2007 for the diagrams.
Currently reading your calculus intuition… awesome. I think you should be charging more for it. Very few people intuitively understand calculus (so integral to most engineering, economics, financial aspects). Kudos for the altruistic dissemination of your hard earned ken.
Might I suggest another topic… probability and random processes. Very important again for engineering and statistics. This too I feel falls under the less understood, and mostly crammed portion of ones study.
Thanks, really appreciate it. I want it to be accessible to people but may have more complete editions down the line (with extra help and guidance). Probability is a great topic too, would definitely like to cover that as well :).
Hi Khalid,
The article is wonderful. Many thanks. I have some doubts regarding market orders.
Sue wants to sell her iPod @ 201. Therefore Ask = $201
Bob wants to buy an iPod @199. Therefore Bid = $199
No matching of Bid and Ask. Therefore Market is at standstill.
Now imagine:
- Sue places a market order to sell. It shall go to the highest bid i.e., 199 to Bob. (Bob gets an iPod at the price he wanted. Sue has to be content with a lower selling price than her expectation)
- Bob places a market order to buy. It shall go to the lowest Ask i.e., 201 to Sue. (Sue sells the iPod at the price she wanted. Bob has to shell out more than he wanted)
Is this the way market order works?
If yes, where does the market maker come into picture? (I couldn’t understand the “How market makers make money” section and the market orders in it)
Please comment.
@Anonymous: In the case where Sue and Bob are dealing with each other, the market maker isn’t needed.
However, let’s say Bob wants to buy, but there is no Sue around? This is the role of the market maker: they have to offer a price Bob can buy at (From Wikipedia: The U.S. Securities and Exchange Commission defines a “market maker” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price.).
Think of a market maker like a currency exchange booth at an airport. If you can find a guy on the street to match your needs, you can just trade currencies directly. But the booth is always there, advertising prices, and is required to buy/sell if you need. They can make money if there is a large line of people at the booth, some buying, some selling. They are essentially trading with the market maker, vs. trading with each other.