I have a very elementary question about the stock market...
Lets say a stock XYZ opens the day at Rs.930 and in the middle of the day, it moves to 931.30. My question is - how did that change of 1.30 rs occur? i understand that it is demand and supply, but what is the exact calculation involved in getting the new price up to the decimal places?
Also i have noticed that most(not all) stocks trade at a price that is a multiple of 5 paise. Is there any special reason for this?
Please take a minute to reply...
People may have different views about why price move in the mkt.
As per my belief, this price movement in due to the perception of market participants.
at 931, there are people who believe the it is cheap and they are ready to buy (say camp A). At the same time, there are people who believe that is good price to get rid of the same stock becuase they don't share the belief of other people (say camp B).
To complete a trade, you need both set of players of there will be a buy order at 931 (bid price) but nearest sell order (offer price) will be at 932. Both parties sitting at their price waiting for other party to give up and accept their price quote.
Buyers create demand, sellers creates supply. If more number of people join camp A, it creates competition among buyers and they start outbidding each other by placsing their bids higher so that they get the stock. Camp B takes advantage of this situation and starts moving their sell price to higher levels so that they get good money for their sell.
At some stage, say 935, some of Camp A members may start beleiving that it is no more cheap to buy at 935 so they don't chase the price. This result in reduced demand and 935 level. Camp B observes this and they start reducing their price to 934.5 so they can find buyers at low price.. and so the price moves down.. Once it comes back to 931, old Camp A members will come back because they still believe that 931 is right price to pay.. so demand starts going up once again at 931 and price makes a nice support level.
This ping-pong game is addictive and thats why we trader, love to participate in this everyday.
5paise/ 1Rs. etc is minimum price increament (called tick size) is decided by stock exchange. It generally based on the stock price range. Say stock < 100rs will have tick size of 5 paise, stocks with price > 1000 will have tick size of 1 Rs etc. Check NSE site for more details.
Happy Trading.
