Stock Prices and How to Use Them
Stock price is the voice of the stock market. And as a voice, it gives you a hint of the status and present condition of any stock.
More than a number telling you the worth of a stock, price is actually a clanging cymbal that can guide you in your investing decisions.
And so it’s quite imperative to have a closer look on this important figure whose swings and sways drive all market participants really crazy, whether small investors like you and me, or big time managers who run and control the funds of big foreign or international investment firm.
The Different Prices
Stock market deals with several types of prices. These prices obviously vary in each stock, but the principles governing them apply similarly to all of them.
We can easily see some of these prices whenever we see quotes of a stock through your stockbroker, or through the website of the stock exchange – Philippine Stock Exchange (PSE) in the case of Philippine stocks.
Below is a sample stock quote fro CitisecOnline.
For online stockbrokers, a stock quote is usually accompanied by some other related stock data that aid us in doing our analysis.
Let’s tackle these prices one by one.
This is the current price of the stock, and the simplest and most basic price we commonly encounter.
From the word itself, this is the price of the stock as dictated by the market.
It’s the entire bush of participants trading in the stock market.
You’re actually one of them if you’re now investing.
As the stock’s current price, this is also the price shown in the colorful ticker flashing at the bottom part of your television in a news or business channel.
You can easily check the market price of any stock through your broker by checking the quotes of that stock.
Because this is controlled by the market, and that this market changes its mind anytime it wishes, market price as a result endlessly changes during trading hours.
This can also be called the Last Price of the stock, or the price in which the last trade was made. (I notice I just use redundant definitions HAHA)
But what does a market price really tell you about a stock?
More than anything else, a market price whispers to you the perceived value of the stock by the market, or the price the market is willing to purchase the stock, which results from how people feel and think of the stock.
Thus, it gives you a hint on whether it’s a cheap (or overvalued) stock when compared to its fundamental or book value.
This is quite straight forward. It’s the price of the stock when the market opens and closes respectively.
Closing price therefore is also the Last Traded Price or LTP (the price when the security was last traded) in a trading day, while the opening price is the First Traded Price of the stock (the price when the security was first traded). Ssssh, don’t ask PSE about the First Traded Price, I just really made up that term. HAHA
The Opening and Closing Prices of all stocks are determined during the Pre-Open and Pre-Close periods respectively. You can get the time for this market period here.
There are rules (or algorithms) followed in determining the opening and closing price of a stock, which depends on the price and volume of all pending orders during the Pre-open and pre-close periods respectively.
How will these two figures help you?
Closing price, together with opening price will tell you the summary of the price journey story in a trading day. Together with the volume data, you can get an idea on how the market actually responded to the stock, and how far the market is willing to go for the stock.
(Related to this is the Adjusted Closing Price or ACP or the Closing Price of a Security with adjustments made due to some corporate events.
Another clear-cut definition, previous price is the closing price of the stock the previous trading day. You can use this then in assessing the present price with its most recent historical price. With this, you can compare the present performance of the stock relative to its previous price.
High and Low Price is the highest and lowest price attained by the security during the trading hours.
It gives you the price range in which the stock moved during the trading day, and thus an idea on the extent of the perceived value of the stock.
Some people leverage on this by doing range-trading: buying a stock at its perceived low price and selling it within the day at its perceived high price. Participants called momentum traders have this strategy to maximize their profits.
This is how a market participant tries to put his say in the value of a stock.
Bid price is the price offered by an interested investor who is willing to buy, while the Offer or Ask Price means the price offered by an owner willing to sell a security.
These bid and ask forces are the ways how the market shout out its voice in dictating the market price.
Related to this are the Best Bid and Offer or BBO. These are the highest buying price and lowest selling price respectively that are prioritized in the order matching processand are therefore lined up in the queue first.
Floor and ceiling price is the lower and upper threshold set by the PSE for any order for said security in a trading day. That means a stock will never attain a price outside this range in that trading day. These are limits set by the exchange, and can be easily calculated from the previous closing price using the following formula:
Floor Price = 0.5 x Closing Price
Ceiling Price = 1.5 x Closing Price
As a result, in any trading day, any stock can only be up or down by at most 50%.
If you’re lucky, you can actually catch a stock hitting this maximum inter-day rise, though it’s obviously very risky given that most of the stocks having this spectacular change are commonly penny stocks. I actually have known someone who has really made his fortune by riding in a stock that had gone up by 50%, though after few consecutive days.
These are another threshold limits set by the PSE in affecting the market price using the concept of Dynamic Threshold.
Dynamic Threshold means the permitted difference in price between two Last Traded Price updates for a given security. In the picture above, the Dyn T Low and Dyn T High therefore sets the highest and lowest next match price for every Last Traded Price. The next trading price should fall within this interval. This in effect controls the extent of jump of a stock price within the trading hours.
Lastly, this best price means the best available price for a Security for order matching purposes. All order matching are done by the Philippine stock exchange using the best price available at the time the matching was made. Because of this ‘best price’, your buy order can be done with your order price or lower (if there’s such available), while your sell order can be matched at your order price or higher (if there’s such available). The stock exchange will automatically look that best price for you once you enter your order in the list. Have fun investing!
There you go!
That too many prices huh?
With these prices in mind, you now have more idea on the most important figure of the stock market!
PS2: All of the prices above are too many to really dwell on. For a longer-term horizon of investing in the stock market, what matters most to you is your entry price (the buy below price) and your target price (or the price you sell). TrulyRichClub gives you these prices for their focus stocks! What's great, from six original recommendations, now they have 10 stocks to invest on with their Strategic Averaging Method (SAM). That's more companies working for you!
Labels: A Closer Look - Special Topics in Stocks Investing, Beginner's Guide to Investing in Philippines