Stock Quotes

Posted by Nick Niesen on November 8th, 2010

Stock quotes are always in flux. The price of a stock is changing because it underlies the laws of supply and demand. Imagine that the price of a stock on the stock exchange always reflects the value of the underlying company in the far or near future and not the current value, then you will understand that the stock price has to change in the present all time. People's belief about the company's future value drives the stock pricing.

Stock quotes are made by the market makers. It's their job to make the market in a stock and therefore they have to post a current bid and ask price at all times during market hours.

The bid price is the price where the market maker will buy from you. The ask price is the price where he sells to you. You must always buy the higher ask and can only sell to the lower bid price. The difference is called the spread and it is the income of the market maker.

If you put yourself in the role of the market maker then you will understand how it works. He has to buy or sell from you even when he has nobody else to trade with. That's his job but it has big risks. The only way to control this risk is to control the spread.

That's why stock quotes are changing as well because the spread changes. The spread will widen for instance when there is very low share volume or when the stock moves very fast. Both situations inherit higher risk for the market maker, therefore the higher spread. On the other side a slow market will narrow the spread. Also when a lot of buyers and sellers lining up the risk is reduced and the spread goes down. The spread can be several points or dollars in the worst case but in the well known big stocks it's only a few cents.

Normally a stock is just a portion of the company and therefore should reflect the value of the company and nothing else. In the very long term this is maybe true but short and mid term there are too many things that influence the perceived value. The stock quotes can change several points or percent within hours although nothing new had happened to the company itself but certain factors were interpreted to have effect now or later.

If the overall market is positive for instance, then your stock is likely to go up too because people believe it will. The stock price can go down dramatically in one day although the company reported good earnings the very same day. Just because there were bad general or sector news. The market went down and took your stock with it.

Don't make the mistake to believe that you can predict share prices. Nobody can even predict the price for the next five seconds. Successful traders don't try to control the stock quotes but take the whole environment and its possible impacts into consideration.