Share Prices

The price of a share is set by the Market Maker for that share. Most shares have more than one market maker, each offering slightly different prices. When You trade, your broker finds the best price available from the Market Makers.

A share price quote consists of a bid and offer price. The bid price is what You can get if You sell a share. The offer price is what You have to pay to buy a share. The difference is called the Spread. The Spread is set by the MM's and is the mechanism by which they make their profits.

The mid price is the price in between the bid and offer prices and is used to quote the current share price of a company in the press and media.

For instance, Amstrad shares might be 150p bid, 151p mid and 152p offer.
So You would buy Amstrad shares at 152p per share and sell them at 150p per share.

When there are more buys than sells the MM increases the price and vice versa when there are more sellers than buyers. Also the MM adjusts the spread. When there are few buyers and sellers (low volume) the spread is widened and vice versa when there are plenty of buyers and sellers (high volume). This is because the MM wants to keep moving stock between buyers and sellers rather than the MM accumulating too much stock or running out of stock. When the MM runs out of stock they sometimes buy stock off another MM at the mid price.

Be aware that the MM's have many other tricks up their sleeves in moving the price. For example the price may be unexpectedly marked up or down by a large amount. This is done to trigger automatic sells or buys that have been set up to occur when certain price points have been reached. Also it may induce panic buying or selling where the MM can pick up or off load stock at a rip-off price. Sometimes the price is adjusted to allow for expected heavy buying or selling following events in the US markets or other factors.

The actual share price may be a few pennies or a few pounds. Generally, the lower the share price is, the higher the spread is as a percentage of the mid price. Also the step changes in share price when adjusted by the MM's is higher. This is why penny shares produce bigger gains and losses and present a higher risk than higher-priced shares.

Numbers of shares.

When a company is listed on the Stock Exchange it has x shares in issue. Multiply this figure by the share price and we have the Market Capitalisation of that company. This is one measure that we can use to decide if a share price is too low or too high.

When we trade in the shares the MM sets a limit to the number of shares that the quoted price applies to. This figure is called the Normal Market Size (NMS). When we buy or sell a number of shares up to the NMS, our trade is normally accepted immediately at the quoted price. However, if we try to trade more than the NMS then our trade may not go through automatically and will have to be done manually by our stock broker who may have to negotiate a slightly higher or lower price with the MM. The MM can adjust the NMS at any time, sometimes making it difficult to trade. The NMS is not usually a problem for the Private Investor unless trading in Small Company Stocks.

Getting started.

You can set up a portfolio of shares at www.freequotes.co.uk and check the prices throughout the day and the value of your portfolio.
The Trades link shows you the actual trades that are taking place on the stockmarket.

Notice that the stocks have a short name called an epic code. For instance the epic code for Amstrad is AMT, the epic code for vodaphone is VOD etc.

If You spend some time exploring the links at Sharelinks, You can learn a lot about shares.

Another good idea is to practise trading. You can do so here:
http://www.investmentchallenge.com/thestreetuk

Here You can enter TheStreet.co.uk Fantasy Portfolio Manager Game. It has a £15,000 grand prize. There is also a weekly prize of £1,000 for the highest net gain. All trades are placed online via their Web site. For maximum authenticity, every trade is placed using current market prices. You have a virtual £500,000 to invest so what are you waiting for?

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