OPM
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Stocks are fractional ownership claims on a company. An owner of 100 shares of IBM owns 100/1,580,000,000th of the company. That owner can vote at annual and special meetings of shareholders. That owner is entitled to proportionate receipt of dividends. That owner is entitled to his/her proportionate interest in the event IBM would decide to disolve itself.
The market price moves with supply and demand changes. When you place an order for an exchange traded stock (stocks trading on an organized exchange, but not the NASDAQ) you are sending an order to buy or sell shares in a company. Broadly speaking there are two category of orders (other categories relate to triggers to trades or special instructions on filling the order) they are market orders and limit orders.
When you enter a market order to buy, you tell your broker to send someone to the floor of the exchange and to continue bidding until you are the high bidder and get the shares. There is no limit to what you will pay. As a practical matter, it is usually near the last price. A limit order instructs your broker to go to the floor and bid any amount up to your limit. If the highest bid is above your price, your order will not fill. Some limit orders are allowed to remain at the floor auction for up to a month (a good til cancelled order).
If you own shares, say of IBM, and you put in a market sell order, you are instructing your broker to send someone to the floor of the exchange and accept any price to get your shares sold and to continue to bid down your shares until someone buys thems. Like the above limit order, if you place a limit then you are informing the broker that you want to sell, but will not accept below a certain price.
The NASDAQ works a little differently. They were originally stores (just like JCPenney). You came in and they sold stocks to you over the counter, or bought stocks from you over the counter. Stocks traded on the NASDAQ do not match buyers with sellers. When you buy a stock on the NASDAQ, the computer looks at the prices each different broker (called a market maker) and gets you the best price. The same is true when you sell. The market maker takes the stocks into inventory or sells them from their inventory. It really does work much like a store, although highly traded stocks have such high volume that the market makers are really matching orders like the exchanges do. The only difference is that market makers on the NASDAQ are required to accept ALL market orders at the last stated price. The exchange only have to accept matching orders, although market makers do exist on the exchanges (called specialists).
There is one other issue not mentioned, cash accounts versus margin accounts. In cash accounts, you own your shares but in order to make a purchase or sell you have to have sufficient cash in your account to buy and sufficient shares in your account to sell. There can be time delays since it can take three days for orders to clear from one owner to the other. Conceptually, it is just like check clearing, it can take time.
The other account is a margin account. In a margin account, you can borrow money to purchase shares beyond the money you have available, up to a limit. This adds risk because you are buying more than you can immediately pay for. As an example, if you had $81,630 you could buy 1000 shares of IBM in a cash account or 2000 shares in a margin account. If IBM's price went to $100 per share you would own $200,000 worth of stock and owe $81,630 plus interest. You could sell, get approximately $120,000 on your $81,630 investment instead of $100,000 on your initial investment. The reverse is true as well. If the price fell to $60, you would have $120,000 but still owe $81,630. Instead of having $60,000 for a loss of approximately $20,000, you would have slightly less than $40,000.
Now that is one side of margin. The other side allows you to sell things you do not own. It is called short selling. You could sell 1000 shares of IBM for $81,630. You would receive the cash and owe 1000 shares of IBM to the broker at some future point. If the price of IBM went to 100 then it would cost you approximately an additional $20,000 to buy back the shares and pay off your loan. Of course if the price went to 60, then you could use $60,000 of the cash they gave you and use it to buy back the 1000 shares and repay the loan. |
ThaneTheBrain
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The stock market is always in perfect balance. As a market maker, I set the stock price to be balanced between buyers and sellers and keep my book even. If I start getting more people wanting to buy the stock, and no one is selling, then I raise the price a little at a time. Eventually, someone will realize the stock is climbing, and sell to take their profits. Then the opposite happens when more people want to sell. It's all about balance. |
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