i have a stupid question here. hopefully someone can answer it. what causes the constant price movement in stocks. for example if share abc is now trading at 100 what will make it go to 101? I think the basic understanding would be, just like if i sell my house and i get an offer for 100 if the next guy wants it then he would have to give me a little more if he wants it. I just have a hard time applying this to the stock market because if everybody is putting in a market order on the buy side and the sell side then why wouldn't it stay stagnant? hope i don't sound too foolish
thanks for the reply. my computer is having trouble playing videos. would you be able to summarize the answer?
thanks for your response. based on my understanding that i got from the pdf the only thing that should change the market is the limit orders. so technically speaking if there would only be market orders then the price wouldn't change?
No the price would change even faster because the market orders will just gobble up the next level(s) of bids/asks and the price will jump to the price level one or several levels down/up since they get matched instantly to the price level(s) currently available.
Market orders. If the market is currently trading at 100 it means that the last transaction took place at 100. Either someone lifted the offer buying 100 @ market or someone hit the bid selling 100 @ market. Keep in mind that market orders always cross with limit orders (which is what you see in the central limit order book). Assuming the market is currently bid/ask 100/101, it will go to 101 when someone lifts the offer by entering a market order to buy at market. Remember, your market order is crossed with the best available offer (currently 101). So, let's say you put in a market order to buy 1000 shares at 101. What happens next? If, liquidity is unlimited @ 101 - price would never move as you can buy as much as you want at 101. There's always a limit order @ 101. You could say that price hits a ceiling. Here's another scenario: You have only 100 shares on offer (limit orders) per each level going higher: 101 = 100 shares offered 102 = 100 shares offered ... 110 = 100 shares offered If you send a buy market order for 1000 shares (meaning you'll accept any price @ market) you will effectively drive price all the way up to 110 as you clear each level for limit orders going higher. However, in practice, it's more complicated as you have hidden liquidity (not all limit orders are posted), liquidity which disappears, liquidity which is added and multiple market participants trading at the same time and liquidity changing as the market moves up and down. That's basically it.
Just forget .... if everyone is putting in a market order. They don't so why concern yourself with it? As for why markets move, they have to - so long as there are resting stops laying "in the line of fire". Stops triggering (like some ET posters) have a way of feeding on themselves.
semi-strong market efficiency; stock prices fluctuate like a random walk along some moving equilibrium price. The microstructure picture (orders being filled) if very different than what's going on in macro (why is someone buying or selling). If you want to trade microstructure, then you need to understand how orders are routed and filled in the first place.
Strong / Weak demand. Imagine the stock is being sold in a little shop (called Wall St.). Some days, a lot of people come into the shop and ask for a certain stock. When that is the case, they can put the price up because people keep asking for the stock. After a while, the people asking for the stock get less, or they buy less because it is now more expensive. Eventually, people will bring some stock back to the shop and say, I don't want it any more. So now the shop has to lower the price to get people to take it until one day more people come again and the cycle starts again... This sounds stupidly simple, but seing it like this has actually helped me to see how stocks work. They go in and out of fashion, And that for many different reasons only the big whale players really know. The key is to not try to understand why, but to see when things might change.