Newbie question..

Danbo!

hi all,

complete newbie to all this, but basically im 23 and have a fairly decent salary at the moment which is allowing me to save €1000 per month. Ive been researching investing rather than saving and theres something I need cleared up, (please remember the term, "there are no stupid questions!")

Lets say "Company A" shares drop from €1 to €0.10. Everyone who owns shares panics. Im thinking, cheap shares... so i buy some. Now that I have my 10 shares I sit around keeping an eye on them. "Company A" shares then jump to €2 each so i sell and ive made myself €19.

First question is - When the shares are worth 10c, is it not going to be very difficult to find someone wiling to sell them?
and the second question - When they are worth a lot, is it not going to be difficult to sell them to make money?

PS, dont worry, my decent salary is not from a job in finance or banking...

portomar

noblestee wrote: »

hi all,

complete newbie to all this, but basically im 23 and have a fairly decent salary at the moment which is allowing me to save €1000 per month. Ive been researching investing rather than saving and theres something I need cleared up, (please remember the term, "there are no stupid questions!")

Lets say "Company A" shares drop from €1 to €0.10. Everyone who owns shares panics. Im thinking, cheap shares... so i buy some. Now that I have my 10 shares I sit around keeping an eye on them. "Company A" shares then jump to €2 each so i sell and ive made myself €19.

First question is - When the shares are worth 10c, is it not going to be very difficult to find someone wiling to sell them?
and the second question - When they are worth a lot, is it not going to be difficult to sell them to make money?

PS, dont worry, my decent salary is not from a job in finance or banking...

disclaimer: i am not william oneill or warren buffett (or even pdelux or arandomwalk! ) but this is how i think share prices change, and the prices are wrong and explanations too simplistic, but here goes anyway.

when you see a price move it is because someone has sold and bought at that specific price. i.e. if a share of aib goes from €16.10 one tick, to 16.09 the next, its because the buyer thought he could get a better price than previously because he thought there was more demand to sell the shares than demand to buy them at that moment, so the seller shouts "I want to sell 100 aib shares" looking at the board, he sees the last price at 16.10 and says "at 16.11" noone wants to buy them at that price. so he says "16.10?" no takers "16.09?" and the buyer says "ill take them" and they close the deal. that as far as i know, is how prices change. now the fact that most exchanges are now electronic only complicates matters but i think im right bout the rest of it. in practice, a share price moves because of differences in supply and demand. if you see a share price move, someone has bought and sold. it is very unlikely you will have any problems buying or selling at the high and lows you have mentioned. something that might help you understand is gapping.

gapping happens, almost exclusively, the moment a market opens. (also sometimes when a big news event happens, such as interest rate cut.)

ok so apple computers closes friday at $100. something happens at the weekend, someones head gets blown off by thier ipod lets say, so apple migh be in for a string of lawsuits. a gap occurs when people enter the market trying to sell the stock, with no-one willing to buy at the price of $100. what happens is the price falls until someone decides the want to buy, so the stock opens at, say $98. gapping is notable by the fact that it doesnt happen all that often to regular stocks, admittedly apple is volatile enough to gap regularly, but a $2 dollar gap would be earth shattering.... lets see what happens when the dow opens tomorrow though.

Danbo!

portomar wrote: »

someones head gets blown off by thier ipod lets say

excellent example.

right that clears it up nicely, i think ill just do some more research and keep an eye out at whats going on at the moment... thanks for the reply!

ircoha

noblestee wrote: »

hi all,

complete newbie to all this, but basically im 23 and have a fairly decent salary at the moment which is allowing me to save €1000 per month. Ive been researching investing rather than saving and theres something I need cleared up, (please remember the term, "there are no stupid questions!")

Lets say "Company A" shares drop from €1 to €0.10. Everyone who owns shares panics. Im thinking, cheap shares... so i buy some. Now that I have my 10 shares I sit around keeping an eye on them. "Company A" shares then jump to €2 each so i sell and ive made myself €19.

First question is - When the shares are worth 10c, is it not going to be very difficult to find someone wiling to sell them?
and the second question - When they are worth a lot, is it not going to be difficult to sell them to make money?

PS, dont worry, my decent salary is not from a job in finance or banking...

One reason for what is called liquidity in the market is that virtually every investor has a different perspective on value: its like beauty, it is in the eye of the beholder, same with value so it depends on where everyone is coming from.

At 10c u see value, I may see more downside.
At 2 euro u see profit, I see more upside.

The make up of the share register is important also in terms of estimating what volume of shares may be traded

see page 157 of this link
http://miranda.hemscott.com/ir/aib/ar_2006/ar.jsp

81% of the shares are held by 0.6% of the shareholders by number: in this case directors etc will not own a significant number of shares, contrast that with the share register in the Sir Anto Indo Group

portomar

noblestee wrote: »

excellent example.

right that clears it up nicely, i think ill just do some more research and keep an eye out at whats going on at the moment... thanks for the reply!

if your looking for some general info, read through a few of the posts here, some wuite good info. generally though you're concerns of not being able to buy low sell high are pretty groundless. theres a famous saying bout the stock market:

“It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.” - William O’Neil

take the example of northern rock, you will find a thread on here of people advocating buying northern rock shares because they were "cheap". northern rock is now a fraction of the price it was at this time. this is why generally, youll never have a problem buying or selling.

Minder

Understanding share prices is a complex subject, but an explanation of how markets operate should include some understanding of how the market makers operate - see below...

Market maker
From Wikipedia, the free encyclopedia

A market maker is a firm who quotes both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the turn or the bid/offer spread.

In foreign exchange trading, where most deals are conducted Over-the-Counter and are, therefore, completely virtual, the market maker sells to and buys from its clients. Hence, the client's loss is the market-maker firm's profit and vice versa. Most foreign exchange trading firms are market makers and so are many banks, although not in all currency markets.

Most stock exchanges operate on a matched bargain or order driven basis. In such a system there are no designated or official market makers, but market makers nevertheless exist. When a buyer's bid meets a seller's offer or vice versa, the stock exchange's matching system will decide that a deal has been executed.

In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have a single exchange member, known as the "specialist," who acts as the official market maker for a given security. In return for a) providing a required amount of liquidity to the security's market, b) taking the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders, and c) attempting to prevent excess volatility, the specialist is granted various informational and trade execution advantages.

Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability to naked short a stock, i.e., selling it without borrowing it. In most situations, only official market makers are permitted to engage in naked shorting.

On the London Stock Exchange (LSE) there are official market makers for many securities (but not for shares in the largest and most heavily traded companies, which instead use an automated system, SETS). SETS is scheduled to be replaced by TradElect on 18th June 2007. Some of the LSE's member firms take on the obligation of always making a two way price in each of the stocks in which they make markets. It is their prices which are displayed on the Stock Exchange Automated Quotation system, and it is with them that ordinary stockbrokers generally have to deal when buying or selling stock on behalf of their clients.

Proponents of the official market making system claim market makers add to the liquidity and depth of the market by taking a short or long position for a time, thus assuming some risk, in return for hopefully making a small profit. On the LSE one can always buy and sell stock: each stock always has at least two market makers and they are obliged to deal.

This contrasts with some of the smaller order driven markets. On the Johannesburg Securities Exchange, for example, it can be very difficult to determine at what price one would be able to buy or sell even a small block of any of the many illiquid stocks because there are often no buyers or sellers on the order board. However, there is no doubting the liquidity of the big order driven markets in the U.S.

Unofficial market makers are free to operate on order driven markets or, indeed, on the LSE. They do not have the obligation to always be making a two way price but they do not have the advantage that everyone must deal with them either.

A Random Walk

You're asking about liquidity which is one of the key functions of a stock market. The ability to find people who will buy and sell your companies shares at any time is a major reason why companies float on the stock market in the first place.

There are broadly three ways in which stock markets manage to provide liquidity
a) Order driven systems
b) Market makers
c) Hybrid systems (a mix of a and b)

a) Order driven systems are typically used for the largest stocks e.g. FTSE 100 shares. There is always (or 99.999% of the time) someone willing to trade these shares. Let's say someone who has BP shares is trying to sell them, they may list "500@£10" i.e. I have 500 shares to sell at £10, If there is a buyer out there who is looking to buy these shares at that price, the shares are sold.

If the buyer is willing to pay only £9.90, the stock market systems will show an offer to buy of shares @ 9.90 and an offer to sell for £10. The difference between the lowest selling offer and the highest buying (bid) offer is called the spread. If either party moves to meet the others desired price, the shares are sold.

Because the largest companies will have millions of shares bought and sold every day, the price will fluctuate but you will always be able to buy or sell at some price and the spread will be low.

b) Market makers
For smaller shares, there may not be enough orders to buy and sell going on to make buying and selling shares easy and the spread may be enormous. In that case each company will have a number of market makers assigned to their share. They are typically stockbroking firms and they are required to publish a price at which they will buy and sell shares. These stockbrokers will maintain a small inventory of the companies shares and they will compete with other market makers to offer the best price.

c) Hybrid systems are a mix of the two systems above

None of the above really matters to the smaller investor most of the time but can be very important in certain special situations where there is little liquidity in a share. More on that later...