Homework: Market Mechanics, How a Trade is Processed
Started May 17 2009 at 10:36AM (EST) (By DowJonesDave)
quite often I talk with aquaintances about economics and the market. Sometimes a concept creeps in that I usually avoid, which is the three different prices that a stock or bond has. They are listed below. If you don't instinctively know the meaning of these terms, you need to look them up and read the definitions until you really get it.
The terms make up what is known as the "spread."
"Market Price""Bid Price""Asked Price"
These are three different prices that are always present. Knowing which price you are paying is always important.
That's the assignment.
The terms make up what is known as the "spread."
"Market Price""Bid Price""Asked Price"
These are three different prices that are always present. Knowing which price you are paying is always important.
That's the assignment.
This post is more than 60 days old. Replying to it might be confusing for other members reading the discussion.
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5 Comments
Top 2%
miller
May 17 2009 at 11:28AM (EST)
The way I understand it, the "Spread" is the difference between the asking price of a stock and the amount someone else is willing to pay for it. When someone buys a stock "At Market" he is in fact buying from the lowest seller. Since deals are done continuously you can never know the exact price you will strike.. therefore "Market price" will always be higher than the Ask and lower than the bid..
How am I doing, teach?
Top 1%
DowJonesDave
May 17 2009 at 6:38PM (EST)
Close. The asked Price is what you pay as a buyer, the bid price is the price you get as a seller. The market price is the price at which the last transaction occured, usually but not always at either the bid or the asked.
The difference between the bid and asked is what the market maker gets for supplying the market.
So the market price (which is what all accounts are valued at) isn't really the price at all it's just where the last transaction occured, and the Bid/Asked may have moved to to the volume or lack of related to the fill.
So you put in an order to buy at the market price and let's say u are buying a lot. So there are enough sellers at the curent bid to cover half your order, but not the other half. At that point the bid would be raised (and the asked usually) untill a seller is found.
Once the seller is found the rest of your order would fill at the upticked asked and you would get a secondary fill at the higher price. A limit order guarantees that you won't pay more than u want, but also usually has an extra charge, and may result in a no-fill.
So that's how prices move, and how the three diferent definitions of stock price works.
Top 2%
NAJInvest
May 17 2009 at 10:50PM (EST)
So, why would anyone ever use a market order? Maybe, because they want to liquidate as quickly as possible? Aside from that scenario, I would always use a Limit Order. Unfortunately you can't at MG, but I always do with my real $ account. Wouldn't you say that using a Market Order is just asking to get ripped-off?
Top 81%
KanGuru
May 18 2009 at 3:24AM (EST)
I always buy with limit orders, so my actual buy price will always equal or better the limit I've set.
When selling, though, I sell at market, since at that point I want to get rid of the stock, I 'll take whatever the going price is at that moment.
Top 1%
DowJonesDave
May 18 2009 at 5:58AM (EST)
To my way of thinking a market order guarantees a fill.