Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 147

indicator of the general level of activity (liquidity) of a certain stock. Also one may look at the volume of a stock in relation to the outstanding shares to gauge liquidity. An average of one million shares per day for a stock may have a different meaning if there are 100,000 outstanding shares or if there are 10 million outstanding shares of that stock.

How about the relation between the volume and the stock price? Is there a difference in liquidity between one million shares traded on a $1 stock versus a $100 stock? Let's not quibble here. Liquidity is certainly an arbitrary concept when it comes to stocks. Normally I would consider 300,000 or more shares per day as high volume, 100,000 to 300,000 average volume, and less than 100,000 shares per day as low volume. You may consider other values as volume gauges.

Let's look at our Ford stock example. Suppose the going price for Ford shares is $50 and you decide to jump in and buy 20 shares. You would place an order with your broker to buy the 20 shares at $50 per share (limit order). Your order enters a bid pool with the rest of the orders and the hunt is on to find a match with the selling pool to execute your order. If the current ask price for Ford is 50 1/4, your order will not execute. Instead you order will continue to be in pool until the ask price drops down to your bid level. Meaning that a seller gets tired of waiting and lowers his price. This may or may not happen. It all depends on supply and demand. The ask price may never come down to your bid level; it may actually go higher, which means that your order will never get executed. Or it may start to move lower, picking up your order on its way down and come to rest at a much lower point than your original bid (at which point you curse yourself for bidding so high, but how could you know?).


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