Author Topic: new to buying stocks - help me understand price  (Read 6046 times)

Heckler

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new to buying stocks - help me understand price
« on: November 19, 2014, 11:32:39 AM »
So, two days ago I put in an order to buy VAB at $25.20.   That order hasn't yet been filled and I've set it to expire tomorrow.

Currently, this is the state of pricing:

Bid: 25.22   High: 25.24   
Ask: 25.23   Low: 25.20   
Open: 25.24   Previous Close: 25.26


Is the stock market an auction?  Does this mean that I'm underbidding by $0.03 and run the risk of having my order not filled, thus cancelled?  I'll always try to bargain, and bought my house at under asking price in a hot Vancouver market, and my agent laughed at me but then was shocked they accepted and his commission reduces. 

How does this work?  If I had bid $25.00, does my order get laughed at in the exchange, or could I also bid $24 with the realistic expectation of it getting filled?

What if no one is selling their VAB - does that mean I can't buy?

Cheddar Stacker

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Re: new to buying stocks - help me understand price
« Reply #1 on: November 19, 2014, 11:42:01 AM »
Someone has to sell in order for you to buy. Someone has to agree to sell at your offered price in order for you to buy it at that price. No one will do that if someone else is offering a little more.

It's very different from a house. There might be 20 potential buyers for a house. After they all see the property in person, maybe that buyer pool drops to 5 and only 3 make an offer. On the stock of a frequently traded company there will be thousands of purchase orders every day. Many of the orders aren't set with a certain price, they are set to purchase at the market price which is volatile.

You may get your price, but not as easily as you might with a house. Nothing wrong with holding firm, other than the opportunity cost of buying today at $25.22 when the price would be $26.07 in a week.

thenextguy

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Re: new to buying stocks - help me understand price
« Reply #2 on: November 19, 2014, 11:45:25 AM »
Yeah, someone needs to want to fill your order. If you're proposing a price below what others are currently trading it for, you might not find any takers.

What if no one is selling their VAB - does that mean I can't buy?

No. There are also what are called "market makers" which are usually large financial firms that provide liquidity in specific situations like this.

seattlecyclone

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Re: new to buying stocks - help me understand price
« Reply #3 on: November 19, 2014, 02:16:16 PM »
Like others have said, the stock market pairs up willing buyers with willing sellers. The stock exchange keeps track of all the people who want to sell, how many shares they want to sell, and the price they have set. The "ask" price is the lowest price at which anyone is currently offering to sell their shares. Similarly there's a list of buy orders with prices. The "bid" price is the highest price on that list right now. You're bidding a few cents lower than that, so you are not first in line to buy shares right now.

Suppose the list is like this:
$25.22 (1,000 shares)
$25.21 (500 shares)
$25.20 (1,000 shares - 250 for you, 750 for other buyers)

If someone puts in a market order to sell 2,500 shares, they'll sell 1,000 of them at $25.22 to the first group on the list, 500 at $25.21 to the second group on the list, and 1,000 at $25.20. You'll get your shares for $25.20. At this point, all the offers to buy for $25.20-25.22 have been exhausted, so the "bid" price you'll see will probably go down to $25.19.

Suppose the seller only wanted to get rid of 2,000 shares. The bidders at $25.22 and $25.21 will still have their orders filled, but half of the bids at $25.20 will remain unfilled. At this point the remaining bidders could wait for another seller to come around at their original bid, or increase their bid to $25.21 in hopes of attracting a new seller who wasn't willing to sell at $25.20.

For popular stocks and ETFs the "bid/ask spread" is usually only a few pennies, new bids get entered all the time, and lots of shares trade hands. You can set your limit price a few cents below the last sale price to try and get a better deal; this will often be successful because the share price will go up and down throughout the day, but there's always a risk that it never quite dips down to your bid. When this happens, you may find yourself paying more than you would have paid if you had just put in a market order at the time you first decided you wanted to purchase shares.

Heckler

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Re: new to buying stocks - help me understand price
« Reply #4 on: November 19, 2014, 05:03:32 PM »
thanks for that excellent explanation cyclone!

Sorry to all for dragging the price down - looks like I'm up next.  It was only a $600 tester buy, so don't expect a market crash anytime soon.  ;) 

Bid      Ask     Last     Change
25.20  25.22  25.21  -0.05   

Heckler

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Re: new to buying stocks - help me understand price
« Reply #5 on: November 20, 2014, 03:36:51 PM »
Thanks again for the lesson!  My order expired, but luckily I just ran into a $500 cheque that I'll add to the order and buy at market price.   This lesson ended up saving me the $10 fee to buy twice - well more than the pennies that would have been saved!

Khan

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Re: new to buying stocks - help me understand price
« Reply #6 on: November 20, 2014, 03:49:27 PM »
Thanks again for the lesson!  My order expired, but luckily I just ran into a $500 cheque that I'll add to the order and buy at market price.  This lesson ended up saving me the $10 fee to buy twice - well more than the pennies that would have been saved!

Do NOT buy at the Market Price. Always use limit prices, which should be available through your brokerage. If you buy at Market price, you could get screwed because you're essentially saying, "I have $1100 and I'm spending it all on 'X' company, give me however many shares you will."

Now in a very liquid stock such as say, Apple, that'll only make you lose out on a couple cents per share, but on an illiquid(microcap, low volume) stock, that could really hurt you.

http://www.scotiabank.com/itrade/en/0,,3969,00.html
http://www.fool.com/investing/general/2005/11/09/market-or-limit-order.aspx

But really, I'd just suggest you stay out of the market until you do a bit more research.

JetBlast

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Re: new to buying stocks - help me understand price
« Reply #7 on: November 20, 2014, 04:09:51 PM »
Thanks again for the lesson!  My order expired, but luckily I just ran into a $500 cheque that I'll add to the order and buy at market price.  This lesson ended up saving me the $10 fee to buy twice - well more than the pennies that would have been saved!

Do NOT buy at the Market Price. Always use limit prices, which should be available through your brokerage.
Exactly. Both buying and selling should be done with limit orders, especially in less liquid equities. If you're willing to buy at the current ask, just place a limit order to buy at that price.

seattlecyclone

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Re: new to buying stocks - help me understand price
« Reply #8 on: November 20, 2014, 04:20:59 PM »
Thanks again for the lesson!  My order expired, but luckily I just ran into a $500 cheque that I'll add to the order and buy at market price.  This lesson ended up saving me the $10 fee to buy twice - well more than the pennies that would have been saved!

Do NOT buy at the Market Price. Always use limit prices, which should be available through your brokerage.
Exactly. Both buying and selling should be done with limit orders, especially in less liquid equities. If you're willing to buy at the current ask, just place a limit order to buy at that price.

Yes, I usually do this. You have no way of knowing the exact price when you put in a market order because if your order happens to cover all the shares at the current ask price you could potentially be paying significantly more than that for the rest of your shares. Again, this is unlikely for a high-volume stock or ETF, but I like to set a limit price within a few cents of the current ask just so I'm not getting any surprises.

Heckler

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Re: new to buying stocks - help me understand price
« Reply #9 on: November 22, 2014, 12:46:57 AM »
this is exactly why I'm in the market with hundreds right now, to warm up for the bigger buy and holds that are coming!


I was using limit orders, and meant I'd set my limit closer to ask next time.

Le Barbu

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Re: new to buying stocks - help me understand price
« Reply #10 on: November 22, 2014, 05:05:14 AM »
You are willing to pay 10$ trade to buy 1,100$ of VAB ? Dont your bank provide some index funds you  could hold waiting to get like 5 to 10k buy orders ?

Here's an exemple of what  i would do at RBC: "buy" (no fee) RBF563 'till I get at least 5,000$ to put an order for VAB. If you hold that amount for 6 month: 5000$ x 0.7% / 2 = 17,50$ so, less than 2 trades. You can lower your cost significantly this way

I manage over 500k, put asside another 25k/year and my trading fees are under 100$/year, average MER at 0.15%

Heckler

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Re: new to buying stocks - help me understand price
« Reply #11 on: November 22, 2014, 10:02:12 AM »
That's exactly my plan.  Amassing in my Sunlife through work (22% of before tax income with 5% employer match; increasing to 60% in 16 months once mortgage is burned), and moving funds annually (no cost move out once per year) to my BMO IL for Vanguard which I just opened. The new IL account has barely the minimum $25k to avoid the annual $100 fee, so I have to get a little extra cash in there- might as well make it work for me.

For learning sake, I'm ok spending $30 for my first three trades to get set up with VAB, VCN and VUN and see how they perform with real money (mine).

At the end of my first year, I'll be at $60 in trading fees.  This will a ginormous improvement over what I was paying Nesbit Burns two years ago ( work directed RRSP I knew absolutely nothing about other than it only cost me too much for little return)

Le Barbu

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Re: new to buying stocks - help me understand price
« Reply #12 on: November 22, 2014, 11:42:37 AM »
Perfect then, looks reasonable