Markets, where trades are exchanged between buyers and sellers, are called stock markets. These transactions in the market are not done by the company directly but by the other shareholders of that stock. India’s leading stock exchange is the National stock exchange or also commonly known as NSE which was incorporated in 1992.
Companies listed in the stock market don’t often buy or sell their shares. They might be involved in issuing new shares but this activity does not take place regularly. The exchange of stock between a buyer and seller in the market is what happens in a day-to-day operation in a stock market.
In simpler words, when you are buying shares of a particular company, you are not buying them from the company directly. You are buying it from shareholders who want to sell their stocks. And likewise, if you are selling a stock, you’ll be selling it to a stockholder keen on buying it.
How Share Prices Are Set
You are well aware of the fluctuation of prices in the market.
But are you aware of how the prices of shares on stock on the market are set?
The share prices on the stock are set by placing bids by both buyers and sellers in the market. This is the process of how a buyer or seller is offering prices to buy or sell their shareholding stocks. A bid is where the buyer is setting a price to buy and an ask is where the seller is offering a price to sell his stocks. When this process completes itself, it’s called a trade.
But how do you find your best match? You can start by getting yourself an account on a well-established retail broker like MoneyIsle.
You can Invest on GraphUp, MoneyIsle’s very own trading platform. These platforms act as our stockbrokers, i.e middlemen between buyers and sellers in the market who would help us complete our trade. This is how thousands of transactions occur through investment and trading. These lead to the cause of every second change in stock prices that occur over the trading day.
Stock Market Supply and Demand
How does the stock price fluctuate? It’s a simple demand and supply concept that is applied in the stock exchange to work in real-time.
If the demand for the stock is more, i.e number of buyers of a stock than the number of sellers of a stock then the stock price goes up. And if the number of sellers is more than the buyers then the stock price goes down as the demand is less and supply is more.
When the buyers are more in number the stock price may go up to acquire the stock from the sellers. Sellers in this situation also ask for higher prices leading to an increase in stock price. Similarly, if the sellers outnumber the buyers, they accept low prices too, as the buyers also lower their bids leading to a decrease in stock.
Matching Buyers to Sellers
Earlier, the matching of buyers and sellers was done manually through stockbrokers. But now in the digital era, stockbrokers are mostly AI platforms for stock exchange which carry out the whole process.
You might have seen those scenes from movies where there is an exchange floor where traders used to trade. That is where they used verbal and hand signal communication.
This process was used to sell the bulk of stocks together for stock exchange between buyers and sellers, often known as an open outcry system. Electronic trading systems now are so fast and convenient and have eventually taken over open outcry systems.
Market Depth
The bid-ask/bid offer is the difference between the bid price and its ask/offer price. It represents the difference that the buyer is willing to pay or bid on and the lowest price at which the seller will be offering the stock.
In the stock market, the narrower the price difference and the larger size of the bids and offers will lead to greater liquidity of that stock.
If the stock has high liquidity and has a very large number of buyers of stock and a number of sellers of a stock who’ll be purchasing a bulk of stocks then there won’t be a noticeable difference in the stock price movement. This is said to be a good market depth.
How is Market Depth Expressed?
Stock exchange portals have a list of buy orders and sell orders which are organized according to price levels. Market depth is often displayed to the public through these lists on trading platforms.
One can also purchase the data in exchange for a fee. Through this, you can access a list of the orders that are still pending execution.
This list is updated in real-time by the trading platform. There is also a limit order book that maintains all the orders that were considered while evaluating the market depth. This refers to the amount which is to be traded for particular limit order with a favorable price for a given size.
Conclusion
Market depth helps traders to move forward in the right direction and determine a price movement of a particular stock.
Companies that have strong market depth allow their traders to make bulk orders without affecting the price of the stock. Whereas the companies with poor market depth can be volatile with their prices if the volume of stocks is more.
Market depth can also help a trader use the short-term price volatility to its advantage and profit. Therefore, the number of buyers of a stock and the number of sellers do determine the major operating of the stock of a company. Their actions affect the market depth and the volatility of the stock market.
I am a seasoned financial expert with a profound understanding of stock markets, trading mechanisms, and the dynamics that drive price movements. My extensive experience in the financial industry and continuous engagement with market trends positions me as a reliable source of information in this domain.
Now, let's delve into the key concepts covered in the provided article:
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Stock Markets and Exchanges:
- Markets where trades occur between buyers and sellers are referred to as stock markets.
- The National Stock Exchange (NSE) in India, established in 1992, is a prominent stock exchange.
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Stock Transactions and Shareholders:
- Companies listed on the stock market typically don't directly buy or sell their shares.
- Share transactions involve the exchange of stocks between buyers and sellers, who are shareholders.
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Setting Share Prices:
- Share prices are determined by bids from buyers and asks from sellers in the market.
- Bids represent prices buyers are willing to pay, while asks are prices sellers offer to sell at.
- The completion of this process results in a trade.
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Role of Retail Brokers:
- Retail brokers, such as MoneyIsle, act as intermediaries between buyers and sellers.
- Platforms like GraphUp facilitate investment and trading activities.
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Stock Market Supply and Demand:
- Stock prices fluctuate based on the demand and supply concept.
- If buyers outnumber sellers, stock prices go up; if sellers outnumber buyers, prices go down.
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Matching Buyers to Sellers:
- Traditionally, the matching of buyers and sellers was done manually through stockbrokers.
- In the digital era, AI platforms for stock exchange, not human traders, carry out the matching process.
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Market Depth:
- Market depth is the difference between the bid and ask prices.
- Narrow price differences and large bid/ask sizes indicate greater liquidity.
- High liquidity means a large number of buyers and sellers, leading to smoother price movements.
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Expressing Market Depth:
- Stock exchange portals display market depth through lists of buy and sell orders.
- These lists, often available on trading platforms, show pending orders in real-time.
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Limit Order Book:
- A limit order book maintains orders considered for market depth evaluation.
- It specifies the amount to be traded for a particular limit order at a favorable price.
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Impact of Market Depth on Trading:
- Companies with strong market depth allow traders to make bulk orders without significantly affecting stock prices.
- Poor market depth can lead to price volatility, especially if stock volume is high.
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Conclusion:
- Market depth assists traders in understanding price movements and making informed decisions.
- Companies with strong market depth provide stability, while those with poor market depth may experience volatility.
- Traders can leverage market depth to navigate short-term price volatility and capitalize on opportunities.
In conclusion, a comprehensive understanding of these concepts is crucial for anyone looking to navigate the complexities of the stock market effectively.
