I have only a basic understanding of how stock markets work, so I’m looking for a resource that can help me figure them out a little better.
There are a couple of specific questions nagging at me at the moment:
1. Do stocks normally open higher than the previous days close and why?
2. What’s going on when there is movement of a stock price (both up and down) but relatively few shares are being traded?
If anyone can point me to a good source for answers to such questions, I’d be thankful.
UPDATE: Bryan Murley has helped me with the first question. But his answer raises another question: is there a way to track after-hour trading (ie. share volume, etc.)?
UPDATE II: After doing a little research on the second question, I’ve come to this understanding: up or down movement of a stock, with a relatively low volume of trades, makes changes in price fairly meaningless. Movement of shares, with a large volume of stock (compared to the average volume) being traded, would be a better indictor of how the stock is trending. Do I have that right?
Not specifically related to the questions you asked, but I really enjoy the Planet Money podcast and blog – npr.org/blogs/money, which explains a lot of things.
Re no. 1: there is after hours trading that changes the price.
can’t help with number 2.
Sure, they open at a different price because the supply and demand change overnight. Say a company makes a significant announcement after the close of the market one day. The next day, buyers and sellers will take that into account and the price will be up or down accordingly. The price is never a smooth curve; there can be big jumps intraday as well. Suppose, for example, somebody comes along mid-day, or overnight, and wants to sell a million shares quickly. Unless there happen to be ready buyers for that quantity, the price will drop, quickly, until there’s equilibrium.
When there are few buyers and sellers, the market is operated by specialists on Wall Street, who accumulate shares when there are sellers but few buyers, and vice versa. In a slow market, if there’s nothing but sellers, that will cause a rapid price drop as the specialist keeps dropping the price he is willing to pay to absorb the excess shares, and conversely on the upside.
Check the Wiki on Market Makers: http://en.wikipedia.org/wiki/Market_makers