Stocks and futures movement and reality....

[JesseLivermoreII]

Would some kind soul please explain what is actually happening when a stock price moves up and down. What is taking place in the real world - out there - to make the price change. And what about opening gaps ? And as for futures prices...how do they change....where are they ?
This forum is an absolute gem and has been invaluable. I think all regular contributors should give thenselves a BIG pat on the back....really appreciate your time guys.

 

[sidinuk]

Simply put, changes in price come about through the laws of supply and demand. If there are more buyers than sellers at a particular price then the price will rise to discourage buyers and encourage sellers until equilibrium is restored. Conversely if there are more sellers than buyers then the price will fall to encourage more buyers and discourage sellers.

The mechanism for the markets, however, is different for stocks and futures. All stocks have an assigned market maker whose job it is to make a market in that particular share, they must quote a bid and an ask price. They make their money on the spread.

Futures do not have a defined market maker and prices are matched between individual participants in the market.

Generally futures continue to trade electronically out of normal market hours, matching up buyers and sellers albeit with a much reduced liquidity. For example the e-mini s&p 500 contract trades from 16.45 to 16.10 (US time), ie 23 1/2 hours a day! Futures can move a long way out of normal trading hours leading to what appears to be an opening gap when normal trading hours start.

If the futures trading indicates a strong move in the market out of hours or there is specific news relating to a company, then the market makers in stocks will post their opening prices accordingly, leading to a gap open.

 

[wysinawyg]

<i>All stocks have an assigned market maker whose job it is to make a market in that particular share, they must quote a bid and an ask price. They make their money on the spread.</i>

I thought FTSE 100 was through SETS and so bargain matched rather than with a market maker?

wysi

 

[JesseLivermoreII]

Thanks but...

I'm afraid you've both lost me already....so is there physically just one market maker - one person ??? And i still don't understand what is making the market change direction. I mean at the moment, are they just trading for very short term gain, in and out ? Cheers guys....

 

[mooms]

In a nut shell.

If the stock is up there is a demand for it so people are willing to pay more for the stock.

If the stock is down the people are willing to sell at a lower price just to get shut of there holding.

The stock market is a zero sum game.

For every buyer there has to be a seller.

Hope this helps

 

[sidinuk]

wisinawyg,

Your right SETS does offer order matching for the top 200 companies, but that is still limited to members only being able to post prices, so there are competing market makers.

I was really just trying to explain the different ways that markets are formed. I appreciate it is a lot more complicated than that in reality.

 

[neil]

How It Works

Hi

Scuttle over to Amazon and seek out a book entitled " How the stock market really works"

and rummage at our book section here for appropriate titles.

Will keep you busy for hours.

 

[wysinawyg]

The one by Phillip Coggan? I got it free after he gave a talk at work, though I don't think I ever actually got round to reading it (actually have no idea where it has got to!)

wysi

 

[Dr Mike]

This site may be helpful

http://www.uksharenet.co.uk/article_market_makers.shtml

 

[JesseLivermoreII]

Thanks everyone. Good work. The website is helpful Dr. Mike.
Happy trading....