How Can I Predict the Market Price for a Stock?

Ask SmallIvy

 

Dear SmallIvy,

How can I determine the market price for a stock?

Trevor

Dear Trevor,

The market price for a stock is actually made up of three prices, the Bid, the Ask, and the Last Trade.  The Bid price is what someone who wants to buy the stock is willing to pay.  The Ask price is what a person who is selling a stock is wanting for their shares.  The difference between the Bid and the Ask price is called the spread.  The Last Trade is the price at which the last set of shares changed hands.  Usually when stock prices are reported, the Last Trade is reported, although it would give a better picture if all of the prices were reported.  All three of these numbers can be found at Yahoo and other sites that provide stock quotes.

When you enter a market order to buy, your broker will buy shares at whatever the current Ask price is.  Note that if you are buying a lot of shares this can get a little more complex because actually your broker will buy as many shares as he can at the current Ask price, and once sellers at that price are gone, will start buying at higher Ask prices until the order is filled.  In fact, if there are other people in line in front of you, you may actually not get any shares at the current ask price, resulting in your purchasing shares at a higher price entirely.

One way to avoid the above issue is to order a Limit order.  A limit order says that you are willing to pay only a certain price.  The order will not be filled unless the ask price drops to the level of the limit.  For example, if you entered an order to buy 500 shares of XLNX at $50 per share and the current Ask price was $51, you would not buy any shares until the ask price dropped to $50 or lower.  Orders are normally good for only one day.  You can extend the time period (particularly for limit orders) to 30 days by making the order GTC, or Good ‘Til Cancelled.

I hope this answers your question.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

The Dangers of Stop Loss Orders

Unbelievable day last Thursday.  The Wall Street Journal published an article on some of the wild  activity on the stock market (see link): 

http://online.wsj.com/article/SB10001424052748704292004575230634251738768.html

Some stocks dropped from normal prices of $50 or more per share down to near-zero or actually zero.   In other cases, some stocks surged.  Sotheby’s stock price actually rose from $34 to $100,000!  The quip of the day was from Diana Phillips, Sotheby’s spokeswoman, who said “Clearly, it has been undervalued!” in an email. 

While the exact causes are still under investigation, it was found that the automated rapid trading firms stepped to the sidelines when trading at the NYSE got clogged.  Trades that normally were executed in less than a second were taking a minute or more to execute, causing the firms to step aside since the market was not acting in a way conducive to their trading strategies.  When this happened, the liquidity dried up, such that there were sell orders but no buy orders, causing the wild price swings that were seen.

One issue that occurred was that stop market orders (see post “Types of orders” for a definition of a stop market order, http://smallivy.wordpress.com/2010/03/25/types-of-orders/) were executed because the price of various stocks fell below the limits that were set, causing investors to sell their shares at very low prices.  When the stocks returned to their previous prices, these investors were left on the sidelines with big losses.

This is an extreme case,  but in general I don’t recommend using stop-loss orders because various traders will move the prices of stocks around to try to hit these limits and cause the stock to move up or down.  If you buy quality stocks that you plan to hold for long periods of time, you’ll want to hold through the minor market fluctuations anyway.  If you have a big profit and are just using a stop order to avoid having to pull the trigger and risk missing out on future gains, you are likely to see the stock move down to your stop limit, sell your shares, and then continue on its merry way upwards.  Just sell the stock.   Remember the rule, “Don’t Get Cute”. 

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Clip art from http://www.retrographix.com/