Understanding the Market

[MarkSA]

I believe I understand most of the basics of the Bid/Ask, but I've been watching L2 screens for certain stocks over the last few days and a few questions have come to mind.

If I wish to buy a stock immediately (Market Order), I pay the Ask price assuming all of it can be filled at that price. If I wish to sell a stock immediately (Market Order), I pay the Bid price.

Where does the actual price of the stock fit into that, though? I often see cases where the price of a stock is exactly the same as the bid price (for instance), yet from looking at the L2 screen, I can't understand why. There doesn't appear to be more buying pressure than selling pressure in that case. What pushes the actual price of the stock more toward the Bid than the Ask or vice versa? And is the actual stock price really good for anything besides a progress marker for the price of a stock, since Buys/Sells rarely take place at it?

In addition, there have been times when i've watched the L2 screen for certain low volume stocks during the day and there doesn't appear to be any Bid/Ask offers. What happens if I placed a market order under this circumstance? Does it open the door wide for someone to come along and place an opposite Limit order giving me a gouging price for it? Are there any limits or protections for just how gouged I can be? I've read something about Bid/Ask prices needing to be within the High/Low of the stock for the day to be legitimate, yet that doesn't seem to make much sense either, since the Bid/Ask is almost always Below/Above the stock price.

Can anyone help?
-Confused

 

[Rhody Trader]

I believe I understand most of the basics of the Bid/Ask, but I've been watching L2 screens for certain stocks over the last few days and a few questions have come to mind.

If I wish to buy a stock immediately (Market Order), I pay the Ask price assuming all of it can be filled at that price. If I wish to sell a stock immediately (Market Order), I pay the Bid price.

Where does the actual price of the stock fit into that, though? I often see cases where the price of a stock is exactly the same as the bid price (for instance), yet from looking at the L2 screen, I can't understand why. There doesn't appear to be more buying pressure than selling pressure in that case. What pushes the actual price of the stock more toward the Bid than the Ask or vice versa? And is the actual stock price really good for anything besides a progress marker for the price of a stock, since Buys/Sells rarely take place at it?

When you mention "actual price" you have to be careful. What you would appear to be referring to is the last executed trade, which is the basis of most data feeds when you're talking about exchange-traded instruments like stocks. That price, by definition, was executed either at a bid price or an offer price at some point in the past. With actively traded markets, that last trade was very recent. In thin markets there could be considerable lag. That's why sometimes you can actually see the last price outside the current bid/offer range - sometimes way outside (look at the options market sometime, for example).

Think about the mechanics of the bid/offer process. The current bid represents the highest active buy order price, while the offer is the lowest active sell order. There is volume associated with those orders. Let's say the bid is 100 for a total of 1000 shares. If I come through with a market order to sell 500 shares, it will be filled at 100. The stock price will then be 100. The bid, though, will not change because there are still another 500 shares worth of buy order at 100 to be filled.

In addition, there have been times when i've watched the L2 screen for certain low volume stocks during the day and there doesn't appear to be any Bid/Ask offers. What happens if I placed a market order under this circumstance? Does it open the door wide for someone to come along and place an opposite Limit order giving me a gouging price for it? Are there any limits or protections for just how gouged I can be? I've read something about Bid/Ask prices needing to be within the High/Low of the stock for the day to be legitimate, yet that doesn't seem to make much sense either, since the Bid/Ask is almost always Below/Above the stock price.

To answer the second part of that, there is certainly no restriction on the bid/offer being inside the day's range. It that were the case, by definition there could never be a new high or low because in order for there to be one there must first be an order outside the current range.

As to the first part, if you put a market order in then you are definitely at the mercy of the market and could quite easily be "gouged". In a situation like the one you outline, a better choice would be a limit order so you can ensure that you do get a bad fill price.

Hope that helps.