Most people know of a co-worker, a friend or even a family member who is actively involved in the stock market – maybe that person “made a killing” or “lost their shirt”. The greatest feature of the stock market is also its greatest hazard: namely that anyone with capital can participate. One of the biggest advantages that great traders have over beginners is that great traders understand that a market is actually an arena of opinions and beliefs.
In this article, we want to expand upon the idea of markets as competitive arenas. Specifically we want to show you that when thinking about trading, it is very important to understand that price is just a reflection of beliefs about a particular stock.
Pick a price, any price
In one of our previous articles, we described the market as a “price discovery mechanism” – that is, through the actions of buyers and sellers of a good (in this case a stock), the market price of that good can be established. In the highly complex world that we now find ourselves in, money – or more accurately purchasing power, is critical to keeping the world going. Having a mechanism to ensure we know how much ‘things’ are worth is absolutely essential to allow people to exchange the right amount of money for those things.
When you see a price quoted for a stock, it is actually slightly misleading in the sense that it leads you to believe that a stock has only one price, when in fact the price for a stock could be one of three prices. In stock trading language, the price a buyer wants to buy at is known as the “bid price”; the price a seller wants to sell at is known as the “ask price” and the price they ultimately settle on is known as the “last price”. It is the “last price” that is often quoted as the “market price”.
