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What actually controls stock prices?
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What actually controls stock prices?

  #1 (permalink)
Trading Apprentice
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What actually controls stock prices?

Do the companies control the prices at which their stocks sell, raising the price as more stocks are sold? Or does the price automatically rise as more are bought, and then go down when they are sold? Or doesn't the number of sales have anything to do with it? Or...???

Also, can you always buy and sell stock when you want to? I had been of the opinion that you could just buy and sell whenever you want, or maybe whenever the market is open. But someone mentioned something about one of the dangers of penny stocks being that you can't always get rid of them when you want to. So can you not always buy and sell when you want? And if not, what places the restrictions?

Thank you for any help understanding these things!
David

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  #2 (permalink)
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  #3 (permalink)
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nopeda View Post
Do the companies control the prices at which their stocks sell, raising the price as more stocks are sold? Or does the price automatically rise as more are bought, and then go down when they are sold? Or doesn't the number of sales have anything to do with it? Or...???

Also, can you always buy and sell stock when you want to? I had been of the opinion that you could just buy and sell whenever you want, or maybe whenever the market is open. But someone mentioned something about one of the dangers of penny stocks being that you can't always get rid of them when you want to. So can you not always buy and sell when you want? And if not, what places the restrictions?

Thank you for any help understanding these things!
David

Hi David - I'd say that the mechanism of price movement for stocks is similar to that of other financial instruments: if an investor thinks that the value of a stock is going to go up in the future then they buy it. If they think it's going to go down they sell it if they already own it. This is at its most basic.

The underlying price value of a stock can be affected by several factors. Mainly, there are certain indicators that tell you how the company which stock we're talking about is doing. Were the company's sales this year better than last year's? Has the company borrowed a lot of money, and can it repay it? How were the company's profits this year compared to last 5 years?

These are just pointers and there's much more to measuring a stock than that. Also, on top of those economic indicators, there may be news coming out about either the company itself or the sector the company belongs to (e.g. IBM Vs. the Technology sector ) that could affect the perception that stockholders have of its price. For instance, if a company was found to have manipulated the financial results and its stock has gone down, news of the CEO resignation may prompt the stock price going up. On the other hand, if a long-time company CEO who has improved the company a lot were to die, the stock may plummet, albeit temporarily.

Again, these are just clues to what usually happens, but there's a lot more to it.

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Market Wizard
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nopeda View Post
Also, can you always buy and sell stock when you want to? I had been of the opinion that you could just buy and sell whenever you want, or maybe whenever the market is open. But someone mentioned something about one of the dangers of penny stocks being that you can't always get rid of them when you want to. So can you not always buy and sell when you want? And if not, what places the restrictions?

Forgot to address the second part of your question. It probably depends on the stock. I am not sure whether 100% of stocks have market makers (they probably do, but I may be wrong on this), whose job is to provide liquidity for the stocks which means there should always be a seller or a buyer for a given stock. The problem is that in turbulent times that liquidity dries up so, while it technically may be possible to sell a stock that you bought, because of low liquidity you may find that the price has crashed so you may sell it at a considerable loss.

Again, this is just a scenario. There's several resources / books that can provide a more comprehensive view on the subject.

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There are also technical (extreme) situations where you can get 'locked' in a stock.

1. a company can ask the market supervisor to 'halt' trading because price sensitive news is coming

2. the SEC can or the exchange can halt a stock. for example a stock can be halted because it is
not compliant with the regulations, like respecting certain obligations like publishing the Q numbers

While these conditions are extreme, you need to be aware that this is possible, and take it into
account on top of the liquidity constraints..

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  #6 (permalink)
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Say a corporation has 100 shares and decides to sell 20 of them on the public market for $10 to finance their operations. The corporation visits an investment bank, and that bank helps the corporation through the process. Towards the end of the process, the bank formally buys those 20 shares for $10 or whatever the bank thinks they're worth, and then sells those shares on a regulated exchange to whoever wants them.

On the public market, individuals and institutions buy and sell those shares among themselves. The price could go down to $1 or up to $100, but the corporation only receives funds from that original $10. Traditionally people buy stocks for their dividend, but that's not always the case. The price of a stock is the last transaction or the average price of those willing to buy and sell immediately. People generally decide the price they'd like to buy or sell at based off financial models produced from the company's quarterly financial statements and public press releases.

From time to time, the corporation may buy back its shares from the public market, increasing its stock price, or create and sell more to finance further operations, possibly decreasing its stock price. That is about the extent to which publicly traded companies are allowed to be involved with their stock.

As for penny stocks, they might be hard to sell because nobody wants them. The company might have just kept printing shares, devaluing all other shares into nothingness, or the company might have other financial troubles that keep it from being on a normal exchange. Normal exchanges also require the corporation have market makers who are obligated to transact shares with anyone looking to buy or sell, and those might not be present for a penny stock.

Don't trade penny stocks. There's probably only five decent ones, and they're all foreign megacorps like Heineken that just don't care about following American exchange rules.

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nopeda View Post
Do the companies control the prices at which their stocks sell, raising the price as more stocks are sold? Or does the price automatically rise as more are bought, and then go down when they are sold? Or doesn't the number of sales have anything to do with it? Or...???

Also, can you always buy and sell stock when you want to? I had been of the opinion that you could just buy and sell whenever you want, or maybe whenever the market is open. But someone mentioned something about one of the dangers of penny stocks being that you can't always get rid of them when you want to. So can you not always buy and sell when you want? And if not, what places the restrictions?

Thank you for any help understanding these things!
David

It's all perceived value ....Supply and Demand of many many participants all at once...IMHO.....

I feel you will be way better off spending time learning and understanding about futures or maybe micro forex (ie FX, foreign exchange, currency pairs). For smaller accounts your hands are tied from the get go in equities by the Pattern Day Trader rules. Needing account minimum of $25k.


Quoting 
The rules adopt the term "pattern day trader," which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level. - See more at: Day-Trading Margin Requirements: Know the Rules | FINRA.org

This business is hard enough without the added constraints of rules like these.

Look into e-micro FX a CME product, please. You will be doing yourself a huge favor in the long run. This is basically the best one so far IMHO E-micro Euro/American Dollar Futures (E-micro EUR/USD) Quotes - CME Group A centralized exchange and not all the convolutedness of stock with dark pools, ECN's, HFT and a Chicago trader spending over $300ml to lay a private optical data line all the way to New York for milla seconds advantage. Learn more here about this... Flash Boys by Michael Lewis

Ron

It is an axiomatic fact that while you meditate you are speaking with your own spirit. In that state of mind you put certain questions to your spirit and the spirit answers: the light breaks forth and the reality is revealed.
The steed of this Valley is pain; and if there be no pain this journey will never end.
Buy Low And Sell High (read left to right or right to left....lol)
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  #8 (permalink)
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Blash View Post
It's all perceived value ....Supply and Demand of many many participants all at once...IMHO.....

I feel you will be way better off spending time learning and understanding about futures or maybe micro forex (ie FX, foreign exchange, currency pairs). For smaller accounts your hands are tied from the get go in equities by the Pattern Day Trader rules. Needing account minimum of $25k.



This business is hard enough without the added constraints of rules like these.

Look into e-micro FX a CME product, please. You will be doing yourself a huge favor in the long run. This is basically the best one so far IMHO . . . E-micro Euro/American Dollar Futures (E-micro EUR/USD) Quotes - CME Group[/url] A centralized exchange and not all the convolutedness of stock with dark pools, ECN's, HFT and a Chicago trader spending over $300ml to lay a private optical data line all the way to New York for milla seconds advantage. Ron

You need to spend at least $25K in order to buy and sell a stock in the same day? I don't get this at all.

I'll look into the e-micro FX. Maybe in a couple of months this will start to make some sense...

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nopeda View Post
You need to spend at least $25K in order to buy and sell a stock in the same day? I don't get this at all.



I'll look into the e-micro FX. Maybe in a couple of months this will start to make some sense...



You have to have an account balance of at least $25k to be in compliance with the Pattern Day Trader rule. Not spend $25k on a stock. You can buy any number of shares you want. An odd lot of say 25 and if it is a $10 stock it would cost you just 25 x 10= $250. 100 shares is considered a "lot" and anything less is called an odd lot. So if you can't be in compliance with the rule and trade more often and have less than $25k in you account your broke has to freeze your account until the correct amount of time passes or you deposit more cash.

Ron

It is an axiomatic fact that while you meditate you are speaking with your own spirit. In that state of mind you put certain questions to your spirit and the spirit answers: the light breaks forth and the reality is revealed.
The steed of this Valley is pain; and if there be no pain this journey will never end.
Buy Low And Sell High (read left to right or right to left....lol)
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  #10 (permalink)
Trading Apprentice
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Blash View Post
You have to have an account balance of at least $25k to be in compliance with the Pattern Day Trader rule. Not spend $25k on a stock. You can buy any number of shares you want. An odd lot of say 25 and if it is a $10 stock it would cost you just 25 x 10= $250. 100 shares is considered a "lot" and anything less is called an odd lot. So if you can't be in compliance with the rule and trade more often and have less than $25k in you account your broke has to freeze your account until the correct amount of time passes or you deposit more cash.

Ron

Who makes those rules and how is it justified for them to make such regulations regarding what we do, or try to do, with our own money? What if a person isn't necessarily trying to be a day trader but they decide to sell a stock the same day they buy it? Will it not be permitted unless they have 25K in their account?

How about swing trading? I'd already decided not to attempt being a "day trader", but so far the seemingly less restrictive idea of swing trading as I interpret it so far seems a lot more reasonable. Are there such regulations involved with that too?

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