Question Dear Tad Borek,
Could you please tell me your thoughts on how price is determined for any stock in a given market. Also, where can I get more information about how market pricing occurs and how it is set on the exchange.
Thank You
Answer Jim, great question, it's a fascinating topic especially at times like this when the markets themselves seem to be disfunctional. There's more to it than I could describe in a reply so I'll point you to some reading.
A good start is the web sites of the exchanges themselves - e.g. NYSE and NASDAQ in the US, and you might want to look at say London (LSE) to see some other variations because these markets all work a bit differently. Each site has an "about" section with a description of how their market functions and the role of intermediaries such as specialists and market-makers. It's gotten a bit more complicated now that there are other trading venues such as ECNs but as you read more you'll see how they all fit together.
If you want more detail, I highly recommend "Equity Markets in Action" which is a long book about market microstructure - that's the jargon for what you're asking about (how are prices determined, instant by instant?). It comes with a CD with some software so you can play around with a modeled market to see how changing different aspects of it affects price discovery. I learned a lot from that book and I think it's a good subject to dive into even if you don't plan to do any short-term trading.
