acid_kewpie wants the algorithm and the who. It's in the link I posted a few back for the Australian Securities Exchange. It's too complex to try to repeat it all here. They spread it out over a few pages with tables and numerical examples. Yes, it's based on supply and demand. Yes, it's implemented in computers. But, what are the details? So, go back and read the document that link points to and then take this discussion into the details if there are any questions about that, or dig up some other examples explaining algorithms that other exchanges use.

That is a very logical conclusion, supply affects demand, however right now if you take a look at what is happening on the markets, (particularly the US) it is not the issue of supply and demand. Global events are a major factor as well, and an obvious example was the 9/11 attacks which brought down the whole world markets. This time however terrorism is not the factor in this equation, however the markets today are as low since the days after 9/11.

The magic word that has been floating around the US which clearly is now a consequence, is the whole sub-prime mortgage debacle. Due to the fact that many people have defaulted on their loans, because of variable interest rates, this is quite possibly the major contributor of the woes you see now in the US stock market, which in turn is also affecting the rest of the world. Also, remember in the UK a few months back and the whole issue with Northern Rock and people's savings? That bank would have collapsed because so many people wanted to withdraw their savings, just how much did that affect the FTSE in London?

At this point, the US Fed-reserve just now cut rates to 0.75% (now at 3.5%) see: http://news.bbc.co.uk/2/hi/business/7202645.stm which in the market world is seen as a very drastic measure. Now, I am not an economist, and I haven't taken an economics class since high school, but I can at least make an educated guess that if the US Fed-Reserve cuts interest rates by THAT much, clearly they are trying to avoid a recession, and quite possibly by some analysts estimates, it might be too late, but I really don't know so the rest of us will have to wait and see. (If there are any users on this forum that has had an economics class recently, feel free to jump in, your thoughts would be greatly appreciated.)

Jeebizz, you're just getting off on what influences supply and demand. Supply and demand here are how many people are willing to sell their stocks (at what price) and how many people want to buy them (at what price).

So, if someone thinks the market is tanking, they might pull their money out of the market and put it in gold. They've just created a supply of the stocks they held. If everyone else is running for the hills, then there is no demand. They might not be able to sell without lowering their price. And, if you are an ordinary person working through a broker, or you are a broker who is panicked, you may just sell, regardless of the price. Some people who got rich after the depression did so because they had the money and flexibility to invest in the market when it was bottomed out.

So there is a lot of emotion and culture in the market, and sometimes you just can't figure out why patterns of buying and selling occur. There are a lot of people playing the market who are trying to guess what's going on and sometimes overstepping themselves. Then a panicked flock of investors can easily create a supply that has no balancing demand and causes the market to drop.

The definition of a free-market price is the equilibrium price created by a large number of sellers who do not need to sell and who do not have such quantities to sell that they could affect supply, transact with a large number of buyers who do not need to buy and who do not want to buy such quantities as would affect demand.

Thus your price (valuation of the company) is different from mine, whether buying or selling. Each of us bring our own rationales to the table. Indeed, we may arrive at the same price for different reasons, whether buying or selling.

Answer: No "one" decides. It's a market function.

Wrong. If a company goes bankrupt and the equity holders (shareholders) are bust, they have a "shed full of shares." In fact, there is a collectors market where people collect worthless shares of stock as art objects, not ownership evidence. When Playboy went public, a picture of a playmate (I forget which one) was on each share. Now that's art!

There's also liquidity problems. If I am a seller and the buyers are there but are offering low prices, I may not like the price, but the market IS, in fact, liquid: I can sell and take a loss. On the other hand, if there are NO buyers -- meaning nobody wants to buy because they have no idea where the market is headed and therefore cannot price their risk -- then I have no offers and I physically cannot sell. I am thus stuck with a shed full of shares.

I'd say there is no specific "who" that can be identified as the cause behind a price change, and that it comes down to a collective decision by the buyers and sellers of the widget. Call it "pricing by crowds" -- there is no single individual person or entity that sets the price, but instead, all stock sales are essentially open auctions where sellers are willing to part with their shares at or above a given a price, and likewise, buyers are willing to exchange their cash for shares of stock at or below a given price. Depending on the group of buyers and sellers participating in the market at any given time, the price point at which buyers and sellers reach equilibrium will vary.

With respect to why a price may go up or down, I'd say it all depends on the collective opinion as to whether the stock will be worth more in the future than it's worth today, or vice versa. To rephrase my previous comment, if more people believe the future price of the stock will be more than its current price (irrespective of why they might think that way) then the price of the stock would tend to increase. Thus, more buyers than sellers, and the price goes up.

On the other side of the coin, if more people believe the future price of the stock will go down (irrespective of their reasons) then the price of the stock will tend to decrease, as more people would rather trade their shares for more money today than less money tomorrow. Thus, more sellers than buyers, and the price goes down.

Just my take on things, my degree is in CS, not Econ

A good programmer, who digs in and asks explicit questions, can sometimes end up knowing more than someone trained in that field who does not.

Case in point -- my older brother came out of the military with computer training and got an entry level job in a bank as a programmer. He was assigned to work on the internal audit system. After just a few years, he knew more about internal auditing processes than a lot of the auditors. He ended up after a few more years as Vice President and Head Internal Auditor. He later moved on to a large chain of banks in a major financial center and ended up being called to Washington to consult with a Cabinet member at the White House.

So, back to acid_kewpie's original question about who and how and all the subsequent replies that have focused on causes, forces and influences rather than on the explicit detail that was asked for.

A market is set up with explicit rules and regulations that control trading and prices. In the internal workings there is a lot of bidding and offering. To those of us on the outside, there is just a single fluctuating price. There is an explicit algorithm that controls how the trading is done and how that price is determined, and I gave an example of that several postings back in reference to the Australian Securities Exchange: http://www.asx.com.au/investor/educa...open_Close.htm . I had hoped others would dig into the details and post comparable examples of pricing algorithms and rules and regulations from other exchanges.

Trickykid also posted some references early in the thread to a wikipedia entry on stock market trading and a couple of popular movies that delve into the details. That also then starts getting into the emotional and cultural dynamics of the market and external causal factors that may drive the market one way or the other. At that point we start linking into broader issues of economics and psychology and sociology. These broader issues are what most of the commentators in the thread have been waving their arms about.

So, being a bunch of good open source computer geeks, how about digging into the code a bit further and offering insight into how it is codified and who wrote the code, both in a direct and figurative sense. I believe that is where acid_kewpie was trying drive the thread. Or have we all gotten too GUI to be able to do that?

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You missed the point of Acid's question -- at least as I understood it. If the market rules and pricing algorithms are not condition tolerant, then the result is a loss of liquidity, and therefore no sales, and therefore no change (or slow change) in price. All of your algorithms only describe how price is acted upon in one market, NOT how price is discovered or acted upon in another market.

Let me give you an example. Let's say that in market 1, the rules are such that a trade can be executed at the same price as the last trade, or 50 cents higher, or 50 cents lower. In other words, the "tick" is 50 cents.

Also, there can be no "prearranged" trading in market 1.

Across the country, or across the world, there is market 2, where the tick (price change increment) is only five cents, not 50 cents. Again, no pre-arranged trading in market 2, either.

Bloomberg, or whomever, reports both markets on its ticker, which can be seen on both markets, 1 and 2.

Let's say that the market price -- the net price in my definitions previously given in my prior posts -- moves after the last trade, and the "market price" has declined by 25 cents.

In market 1, the market is illiquid. No new trades can take place because the tick differential is not met: The market has not moved by 50 cents. In market 2, trades can take place: The tick can move by five units (25 cents) and transactions occur. The market is liquid.

The new pricing information from market 2 is now fed back into the information available to market 1, and market 1 traders will either stay at the old tick (and price) or move down 50 cents to a new tick and price.

Do not confuse market rules and market structure with price. They are very different things. CAN, and DO, markets try to "set" opening prices on occasion that are different from the last night's close? Sure. If they get their estimates wrong however, no trades occur until the liquidity rules are invoked and a "free" trade is allowed in order to establish the new base line tick.

Short answer: You are wrong. Market structures affect trading, not price.

I don't think so. But only acid_kewpie can say for sure.

Did you even read the link I posted?

It looks like there is one other thing we forgot. How about this, a rogue trader costs a French bank $7billion, due to fraudulent trades! http://news.bbc.co.uk/2/hi/business/7206270.stm $7 Billion!? Sheesh. Now lets see how this affects Societe Generale, as well as the French CAC, and if this will have any impact on the rest of the world's markets. Hrmm.

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Yes. I've also owned stocks for 40 years.

Interesting discussion of everything out there. I would have to disagree on the "algorithm" thing. If stock price was as simple a matter of plugging things into a calculation to spit out a price, there wouldn't be any need for a "market."

As to the "who" you are looking for. That's where Adam Smith's concept of "The Invisible Hand" (http://en.wikipedia.org/wiki/Invisible_hand) comes in. There is no single who. It's a collective who.

After all the calculations are completed (and many people have tried to put calculations into the stock market) it really comes down to market forces. A person or group of persons look at the data for Widget Corp and see one piece that indicates a fair market value (FMV) at $25. Someone else sees a FMV of $21. Widget Corp is currently at 23. Who will win? I don't know and I don't think anyone can say with 100% certainty who would, but eventually one of those will be more convincing of his/her position. That is, if external forces don't change things, either.

External forces influence things as much as anything else. If consumer confidence is low, generally speaking money will stop being spent. This will cause the factory manager to lay off people and less money to go into the pockets of the workers, shrinking money supply. Investors see a falling market and decide to go to the sidelines for a while. How does this affect Widget Corp? Well, investors who have the company stock and decide to go to cash sell Widget Corp stock. Does that mean the company is a bad company, that the $21 FMV was correct? No. It simply means people have lost faith in the overall market in the short term.

There is so much that goes into it that we can't address it well in a few short posts. I think someone would have to take up an entire page of posts to do it justice. My best advice: pick up a book. Four years of college and a number of years in the market have helped me, but I know there's others who know more than I do, even.

Oh, and buy low-cost mutual funds or ETFs until you do understand it. Leave the trading to the professionals. Even if you don't fully understand it, that's no reason not to save for the future.

The basic answer to this is the day traders that decide the price of a stock. Depending on how much they sell and buy from each other, that becomes the price of the stock.

Example:
Let's say you have a car and sell it for $200. So the value of the car is now $200.
Now lets say the guy who bought it from you finds someone 5min later to buy it from him for $250. Well the value of the car is now $250.
....this keeps going all day long until the close time at which whatever price was last exchanged becomes stocks closing price.

What makes it sell low or high depends on how much traders expect they can sell it. They usually look at any news that has just come out and if they think they can find a trader who will buy it from them at a higher price, then they buy low now and sell higher later in the day.
Purpose is try to make a profit buy reselling it.

Long-term investors don't play a role since they don't trade daily, they just hold on to the stock and see what happens to it in the future.

Companies only play a role buy how well they are doing, if the market expects them to do good then traders will see the firm in a positive light and will expect other traders to buy the shares from them at a higher priced...
Unless the company itself is involved in day trading.

hope it helps

A stock (or share) is a small piece of a company, so owning a share is owning a piece of a company. This share entitles the owner to receive a piece of future earnings, paid out as "dividends".

The value of a share is the value of all expected earnings discounted over time (the net present value).

The only problem in this valuation is the word "expected". Your expectation is probably different to my expectation, so your pricing of the share will be different to mine.

If your pricing is higher than mine, you will offer me more money than I think the share is worth, and I will sell. Offer me less, and I will not sell.

Brokers (eg. on the NYSE) collect all buy and sell offers and fix a "reasonable" price based on these. As they are paid per transaction, they will fix the price so as to get as many transactions as possible. (Too low and no-one will sell, too high and no one will buy).

I suppose software and electronic markets make for more transactions per hour, but the algorithms are optimized to number of transactions, not any particular price.

This means that anyone trading shares influences the prices. Day traders, bank traders, corporate investors but also Joe the Plumber, you and me.

When "something" happens, maybe a terrorist attack or a strike or a Fed press conference, people's expectations change and therefore their perceived share value. They start to buy or sell, and presto, the market changes.

that link doesn't work for me; can you provide something I can search on.

Well, to quote a phrase, it takes two to tango. An agreement to trade occurs when a buyer AND a seller agree on a price, so there can't be one person who decides it. Both of these parties know, or have the ability to know, the price for which the share in question has recently traded and, depending on their feeling on the way things are going are very likely to be set their expectations relative to recent trades.

In principle, whether you buy something or sell something is very heavily influenced by the price; in practice, there a many situations in which you may be persuaded to go for 'as much as you can get, right now' irrespective of what you think the item is really 'worth'. There are options that you can use to get 'sell anytime you can at least this price' or 'sell if the price falls to this level'. Again in principle, it doesn't really matter whether computers or people are doing this, in practice it really does make a difference because you need the involvement of computers to dump squintillions of shares in a down market.

I put 'worth' in inverted commas back there because, as they say, an item is worth what you can persuade someone to pay for it. Even if you've got a bar of gold, its only worth a dollar if that is the maximum that you can get someone to pay for it. You can bleat all you like about it being worth more than that 'on the fundamentals', but, like the example of selling a car, it genuinely is only worth what someone will pay for it.

(Aaaargh; I've gone off the rails....I've used the phrase 'on the fundamentals' which is normally wheeled out when the market goes somewhere else than you wanted it to and is the equivalent of whistling in the dark.)

And more obviously traded commodities, like oil and copper.

Just because its a market, doesn't mean that anyone likes it. In fact an efficient market probably distributes the misery equally otherwise the ones getting more than their fair share of misery get out of the market.

Its a bit like evolution (the Darwin theory, rather than the software; that's just cr*p {oh, sorry, shouldn't say that} ). When some news item arrives, some people think the prices of widgets will go up, some think they will go down. In 'casino capitalism' the ones that get it right make profits and stay in business, the ones that don't, don't. Excepting bail-outs of course, which is one reason that they are unpopular.

And it is the organisations (rather than the individuals, which is one of the places that it goes wrong) are the ones that stay in business and make profits (and have the chance to evolve into worthwhile life-forms, but if they haven't taken them yet, there seems no reason to believe they will start evolving in a good way anytime soon), but the individuals are the ones that get bonusses and that can encourage some perverse behaviour.

One of the peculiar things about markets is the 'philosophy'; 'buy on the rumour of good news, sell when it comes to pass'. So, you shouldn't be surprised when good financial results result in the price going down. Mind you, 'good results, but not as good as expected' have a similar effect without the need for the explicit underhandness of rumours driving demand.

One result of this is that you can't really say 'what something is worth 'on the fundamentals' (damn, again).

Err, just as a matter of general interest IBall, have you been living under a rock for the last year or so? What's it like? Have any tips on selecting good rocks?

while that is true in general, there are couple of specific situations in which the organisation itself does have at least a strong influence

• IPO
• Share buy back
• Rights Issue

In an IPO, the org offers to sell for a price and they either have enough offers to buy (too many, actually) or not. for a share buy back, they offer an amount of money and there is an implication, for a short period, at least, that the share price will be somewhere close to that; at least if they set the price way too high, they will be offered way too many shares to buy and waste money.

A rights issue has a similar influence on price, but the other way around; if they set the price too high, no one will buy and they will look stupid; too low and they give away equity without getting as much money as they can (and they look stupid).