Question 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.
-Tad
---------- FOLLOW-UP ----------
QUESTION: Dear Tad Borek,
Could you please list me some of the websites addresses, I can't seem to find much on the operations of the markets pricing regulation from where I've looked.
Thanks for Your Assistance
Answer Sorry Jim, I hadn't looked at these sites in awhile - used to be easier to find things there. Here are a couple links:
Nasdaq used to have more stuff there about their market & market-makers but I couldn't find it.
As I said this is a big topic and to get your arms around it will require a lot of reading. That book I mentioned covered a lot more than I ever found on any web site or white-paper from the exchanges themselves. If you google MARKET MICROSTRUCTURE you should be able to find a lot of other materials and books on the topic.
Also - I'm interpreting your question as "how is a stock price set on an exchange?" which is a question about how the market itself operates. If your interest is more in fundamental analysis of stocks - "why is XYZ worth $20 per share to an investor, not $25 per share?" that's another topic entirely - I'd point you to much different reading.
