How the share market works?

joeypesci

So I've been trading as a very, very minor hobby for a few years, with only money I feel I can afford to lose. It really isn't much. First trade was BP taking advantage of their oil mishap then Arm Holdings back when they were only £3.50.

Anyway. Several years on I've put more money in, now adding up to about £5000. I finally got an online account so I can do a trade quickly but have noticed a few things in the past few weeks I'd never know about before. Hopefully someone can explain.

I was watching ARM again for a quick profit, only a small profit but better than nothing. At one point Google Finance listed them at, lets say £9.40. I went to buy but then noticed two different prices. A buy price and sell price? What? But the market says they are £9.40 so why can't I buy them at that price; according to the buy price I have to pay 9.44.

I called the company I deal with to ask the question. They are always friendly and the woman that answered explained "This is the spread.". I'd never seen this before but from what I remember she said sometimes the spread can match the listed price sometimes if there is a lot of movement that day. It turns out the 9.40 is the price they'd pay if you sell them.

I'm still confused. I was starting to think this so called "spread" is actually their commission?

A new issue cropt up today that I also don't understand. I heard news about BT's deal yesterday so ordered some shares but the market was closed when I did. Fine I thought, they'll get purchased first thing in the morning. Closed at 9.90 but the buy offer was 9.94. I agreed to that and put on the order thinking "Well market is closed, surely that will get processed first thing. As the market closed at 9.90 with the buy price of 9.94, surely it can't change instantly because no trading will have been done.". I watched, and nothing, the order wasn't put through. I checked and saw my "limit" order still waiting because the buy price had gone up to 9.99 so they wouldn't fulfil the order.

I called and asked how this happens. They explained just because the market closes with the buy price of 9.94, it doesn't guarantee it will open at that. It opened at 9.95 so they didn't process the order. I was fine with that because I'm new to all this. But how can the price of changed when the market wasn't even open? Surely the market should of opened at 9.94 and all buy orders put on after close the day before should get the 9.94 buy price which would then increase the buy price. Anyone putting orders on that day, would then have to pay the higher buy price.

Can anyone explain how the buy price opened at 9.95 when they market was closed and no orders were being processed to affect that share?

dzug1

Because that's the price the first buyers/sellers wanted to trade at. They are not bound by any earlier prices - and indeed may not know what they were.

Drp8713

I would start doing a lot of reading if I were you.

Talking about making quick profits, whilst not knowing what a bid/offer spead is, not knowing that the opening price can be vastly different from its closing price.

redped

It sounds like you are still trying to understand the basics of the stock market, so have a read of The Naked Trader and it should become clearer to you:

http://www.amazon.co.uk/Naked-Trader-Anyone-Trading-Shares/dp/0857194135

joeypesci

dzug1 wrote: »

Because that's the price the first buyers/sellers wanted to trade at. They are not bound by any earlier prices - and indeed may not know what they were.

Ah right. I assume with the "spread", the price we see on Google Finance or any other share quote site, is only ever the "Sell" price and not the "buy" price?

I'll read the other sites suggested. When I say quick profit, I only mean a tiny, tiny, tiny profit. Such as the other day selling some ARM and only making £60, but it's profit anyway

I know it's difficult and nothing is certain but I wouldn't never !!!! away money I can't afford to lose and don't make stupid trades. I'll watch them for a few weeks to see if they move much and then make a trade. But only if I can pretty much see they are going to go up (which again, I know isn't easy). So far I've done OK with this bar Barclays who are still down from when I bought them over a year ago. I'm also OK with only making £50 or £60 for each trade after commission and costs etc.

I think I'll order that book for my Kindle.

jimjames

Often the price quoted is the mid price, halfway between buy & sell. I find it amazing that you've been trading for several years and have never realised this difference before now.

Do you have a portfolio of other funds or shares as well as the money you are trading? How about an emergency cash fund?

If not then it may be worth building that up too. Trading is unlikely to make massive profits and could lose you money but long term reinvestment is far more likely to be profitable.

joeypesci

jimjames wrote: »

Often the price quoted is the mid price, halfway between buy & sell. I find it amazing that you've been trading for several years and have never realised this difference before now.

Do you have a portfolio of other funds or shares as well as the money you are trading? How about an emergency cash fund?

If not then it may be worth building that up too. Trading is unlikely to make massive profits and could lose you money but long term reinvestment is far more likely to be profitable.

Not noticed it before because it seems every time I ordered the spread was close to what the price was. And I was stupid enough to think buy the time I'd got through on the phone the quote price had gone up so didn't really notice.

I started off very small, £500 and then £1000 in ARM, £1000 in Lloyds. BP are up about 50p a share since buying and ARM have gone up £6 a share since buying them. Waited for Lloyds to be rock bottom so got them about 28p a share and now they are at about 79p. When I sell them I ONLY use that money to reinvest so if I lost it all, I'd only lose the starting £2500. It's just a small hobby. The big money is in the bank. I'm well aware I don't know nearly enough, so I'm not prepared to risk anything big. And I'm well aware it's not a game but do feel a bit stupid not realising that's why the price was different to what I was seeing when I'd call up to buy (before doing it online was using Nationwides one off share deal service). I'd call and they'd say a different price to what I'd have seen. I remember questioning it once but the broker just said "Yeah it's going up as I'm watching" so he didn't explain it was the spread, I thought he actually meant the share (which I understand he's not obliged to).

Also aware I've been very very lucky.

Glen_Clark

joeypesci wrote: »

The big money is in the bank.....I'm not prepared to risk anything big.

Don't think that holding Sterling cash deposits is without risk. As Warren Buffet said 'The risks of being out of the market are greater than the risks of being in' But you need to diversify it amongst lots of shares and sectors to minimize risk.

Ryan_Futuristics

My advice - you have been lucky so far

Always remember the words of the motif from the entrance of the Rockefeller centre ... You can choose whether you want that £5,000 to turn into £50k, then £500k ... or you can choose to keep rolling the dice, going as you are, until you hit your first bit of bad luck and just hope you come out with something left to show for it

The difference is Knowledge ... There's so much at your fingertips today - you can do in 5 seconds, with a stock screener, what took the super-investors of the 1960s a month to do with a team of people and a lot of paper

Vortigern

joeypesci wrote: »

I heard news about BT's deal yesterday so ordered some shares but the market was closed when I did. Fine I thought, they'll get purchased first thing in the morning. Closed at 9.90 but the buy offer was 9.94. I agreed to that and put on the order thinking "Well market is closed, surely that will get processed first thing. As the market closed at 9.90 with the buy price of 9.94, surely it can't change instantly because no trading will have been done.". I watched, and nothing, the order wasn't put through. I checked and saw my "limit" order still waiting because the buy price had gone up to 9.99 so they wouldn't fulfil the order.

BT @ 9.90? I could sell you some at that price!

Jogle

joeypesci wrote: »

So I've been trading as a very, very minor hobby for a few years, with only money I feel I can afford to lose. It really isn't much. First trade was BP taking advantage of their oil mishap then Arm Holdings back when they were only £3.50.

Anyway. Several years on I've put more money in, now adding up to about £5000. I finally got an online account so I can do a trade quickly but have noticed a few things in the past few weeks I'd never know about before. Hopefully someone can explain.

I was watching ARM again for a quick profit, only a small profit but better than nothing. At one point Google Finance listed them at, lets say £9.40. I went to buy but then noticed two different prices. A buy price and sell price? What? But the market says they are £9.40 so why can't I buy them at that price; according to the buy price I have to pay 9.44.

I called the company I deal with to ask the question. They are always friendly and the woman that answered explained "This is the spread.". I'd never seen this before but from what I remember she said sometimes the spread can match the listed price sometimes if there is a lot of movement that day. It turns out the 9.40 is the price they'd pay if you sell them.

I'm still confused. I was starting to think this so called "spread" is actually their commission?

A new issue cropt up today that I also don't understand. I heard news about BT's deal yesterday so ordered some shares but the market was closed when I did. Fine I thought, they'll get purchased first thing in the morning. Closed at 9.90 but the buy offer was 9.94. I agreed to that and put on the order thinking "Well market is closed, surely that will get processed first thing. As the market closed at 9.90 with the buy price of 9.94, surely it can't change instantly because no trading will have been done.". I watched, and nothing, the order wasn't put through. I checked and saw my "limit" order still waiting because the buy price had gone up to 9.99 so they wouldn't fulfil the order.

I called and asked how this happens. They explained just because the market closes with the buy price of 9.94, it doesn't guarantee it will open at that. It opened at 9.95 so they didn't process the order. I was fine with that because I'm new to all this. But how can the price of changed when the market wasn't even open? Surely the market should of opened at 9.94 and all buy orders put on after close the day before should get the 9.94 buy price which would then increase the buy price. Anyone putting orders on that day, would then have to pay the higher buy price.

Can anyone explain how the buy price opened at 9.95 when they market was closed and no orders were being processed to affect that share?

Think of it in terms of "Market Makers". When you buy or sell a share your broker does the deal with a market maker.

Your broker says to the market maker that they want to do a deal with a certain share (but doesn't say whether they want to buy or sell, so that they don't get a skewed price. Ie if they know that you want to buy, they'll charge a higher price in the same way that you don't tell someone from whom you are buying a car that you are really keen on it). The market maker gives one price for buying and a slightly lower price for selling (the spread).

The reason for the spread is that the market maker has to make money and so has two different prices so that there is a slight profit and as a slight cushion against changes in the share price.

The reason why a price seems to go up or down when the market is closed is that in the milliseconds after the market opens, the price adjusts.That adjustment is that same as why a price goes up or down when the market is open; supply and demand.