How are stock prices derived?

When the company decides to go public they set the price and the number of shares I believe. From there, market takes over. Company can then decide to split shares. You can issue an automatic request to buy when the stocks at a certain price become available. You can also mark shares to be sold at a certain price and wait for a buyer to come along. You can also do futures trading where you gamble on what the price will be at some future point in time. There are other things you can do, but I forget what they are. Hope that helps.

At the end of the day, you have to have a buyer and a seller on each transaction. So you can’t have more stock bought than sold on any given day. Someone is always buying and someone is always selling.

The best way to think about it is like this: you want to buy something. You know the price the last guy paid (if I say LURV is at $495.59, that is because the last guy to buy some LURV did it for $495.59). You know the lowest price anyone is willing to sell for and you know the highest price anyone is willing to buy for. Whenever those cross, a sale is made.

On a slow moving stock—something that doesn’t get traded much, you could actually see a pretty big difference between where someone is willing to sell and where someone is willing to buy. A trader could up their bid or lower their asking price to try and induce another trader to purchase/sell, but it would all be done on the computer. You go into your trading software, change your bid/ask, and send the order back out.

How are the buyer and seller brought together? It seems like a logistical nightmare given the number of available stocks. I know the short answer is “the broker” but I’m looking for more detail than that. I guess “how does the broker bring the two parties together” is my question.

Also, if I own a stock and see it is going for $5.05, and I sell shares, they sell for $5.05…or do they? Since the price is always fluctuating, when I sell how could my price be ensured? Might I end up only getting $5.00 for my shares? Would the broker possibly sell them for $5.10 and pocket the difference?

Buyers and sellers are brought together through the trading platform—their software. The software allows them to put in bids and offers and automatically matches them with other bids and offers. So the broker has a screen in front of him. He types in LURV and the LURV page is brought up. Then he clicks on the appropriate place to put in an order to buy or sell the stock. He sets the price (buying, the highest price he’s willing to buy at, selling, the lowest price). Then he waits. Your stock will never sell for lower than the lowest price or be bought for higher than the highest price.

It’s a bit different with brokerages. I’m more familiar with straight up trading. I believe that with a brokerage, if you don’t specify a price (and they may not let you), they give you the average (or maybe their average) for the day, but I’m not sure. I’ve never worked in that area, I don’t know.

The end of the line is: if your broker lets you specify a price, then it won’t sell for less than that and you won’t buy for more than that. Your broker might be able to get a better price than you asked for, but I believe it would be unethical for him to pocket the difference (though it is theoretically possible).

Edited to add: in my small number of dealings with brokers—whenever they do get a better price, they are often eager to share that with the client in a kind of “see how hard I’m working for you” way.

Excellent answers, thanks for sharing your knowledge.

So there is some waiting involved once you put in the buy or sell order to your broker. This makes more sense, b/c I thought it was nearly instantaneous. Let me see if I’ve got this right: as you mentioned earlier, imagine I have a rarely/slowly traded stock and I could see the last price at which it sold was $10.50. I put in an order to sell a few shares. Possibly I could never get that price, or it could take days, right? If I give my broker a range, he will be more likely to sell it faster. Is this a realistic scenario? Let’s say I told the broker, “well I’d like $10.50, but I’ll take $10 if I have to”, does the broker put out the $10.50 price, then wait a day, drop it a quarter, wait, etc…?

Sorry to inundate you with questions, but this has always perplexed me. I see the enormous advantages of using software, but how the hell did a broker manage in the 50 years ago?

50 years ago this all went down in “the pit” and people would actually shout orders and accept them by trading slips of paper and things like that. I don’t know all the ins and outs of that version, but it was immensely complicated, I’m sure. And a broker would call a trader on the floor, tell them what to do, and the trader would work on it. The more human back and forth could have even happened then.

But in today’s world, you are exactly right—it is possible that you would never get a price you put in, but you can tell the broker to always put that order in anyway, just for the day you get lucky. If you give your broker a range, he might sell it faster, he might not—depends on the range and the stock. If you say, “I’d like $10.50, but I’d take $10 if I have to” then you are depending entirely on your broker to not get lazy and just put in $10. You could manage that a little by saying, “I’d like $10.50, but if it hasn’t sold there in a week, let’s drop it down an little and see what you can do, don’t go below $10”. And that range is completely realistic—I’ve heard orders like that before.

So there’s no more pit, like in Trading Places? That must have been nuts, total chaos.

Your answers helped me out a lot, thanks. The concept is simpler than I expected, but makes complete economic sense.

There are still a few pits—there is one in the CBOE, but for the most part, they are gone. And even that one is somewhat more mechanized that back in the day.

And you’re welcome.

Just want to add more on broker being good and all.

There are lot of brokers, and competition among them. Mostly when you give it to a broker you won’t say the price. You give him the equity, count, b/s. He gets back saying that he bought Xnos of Y at $Z. You do a casual check on Y, and find that the price is varying by $1. You ask for explanations, if it is satisfactory you continue with him else find another. The brokers earn their bread by the fee you pay per transaction. So its unlikely that they would cheat. If they cheat there as ways to find it. So its not easy to cheat.

Yes. Supply and demand dictate the direction of the stock and the price is determined somewhere in between the bid and ask. Also, always place limit orders so you can be sure of your entry and exit points. Brokers don’t cheat you on the price because it’s easy to get caught, but realistically, they only care about one thing…COMMISSION…and it’s pretty much a sure thing to execute a market order (there’s always liquidity for us little guys) other than a limit order which might not be reached. By the way, you can edit your buy and sell limits as you wish. One more thing, of course we still have “the pit”, it’s called the NYSE! Where buyers and sellers representing the brokerage firms interact with specialists who represent the companies to derive an executed price. The NASDAQ is an example of an electronic exchange, where prices are electronically executed. These exchanges compete for the best companies. Ex: The ticker symbol M is left open on the NYSE for Microsoft, which trades on the NASDAQ. @cockswain I hope I haven’t confused you but I am an active trader and investor and if you have any questions, feel free to ask.