Understanding supply and demand AKA The Stock Market

The stock markets can be looked at as a bartering system.

When you look at the stock symbol ICE on the NYSE from Google Finance, you will see beside shares the number 595.00 million.  Therefore, there is a finite number of shares available. In the case of ICE, Intercontinental Exchange Inc, 595 million shares.

Since there is a limited number of shares available that are owned by someone, you must bargain or accept the offer.  This is where the term market order and limit order comes in.

  • Buy limit – I will only buy at this price or lower
  • Sell limit – I will only sell at this price or higher
  • Market – Give me whatever offer is there.  I will take any price.

Market is quite dangerous for stocks where there is little investor interest.  A buyer may offer $49.00/share for a stock that last traded at $50.00/share.  Furthermore, a seller may offer $51/share to sell.  If the buyer is the highest priced bidder and the seller is is lowest priced seller, you will either, using a market order, sell for $49/share or buy for $51/share since they are the traders offering the best prices.  In turn, the last traded price will reflect the price you last traded at.  You are now an instant celebrity.

Companies will do share buybacks which should increase the price/share.  This will decrease the number of shares outstanding.  In the case of ICE, a share buyback of 5 million shares will decrease the outstanding shares from 595 to 590 million.  Less shares in the market will hopefully boost demand.

The other end of share buybacks is called common share dilution which can decrease the price/share.  This will increase the number of shares outstanding.  In the case of ICE, a share dilution of 5 million shares will increase the outstanding shares from 595 to 600 million.  More shares in the market may reduce demand.

The Monkey Story on How the Stock Markets Work

BRK.A on the NYSE has 776,378 shares outstanding for $252,301/share.  1 share of BRK.A is worth more than a pound of gold.

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