A stock actually has three prices. The most well known and frequently quoted, of course, is the “last,” or the last price at which the stock most recently traded.
And for most of the popular and actively traded stocks like Oracle (ORCL) or 3M (MMM), it’s not uncommon to have one penny spreads between the bid and the ask prices with thousands of shares available to trade on both sides of the market.
But given the fact that many stocks, especially the less liquid names in which I’m most interested, can go a few minutes or hours without being traded, I find it important not to just monitor the “last” price of my investments, but the order book itself.
The last price is ancient history. As we wrote a few years back, the real market is quoted not by the last price, but by the highest “bid” and lowest “ask” prices, along with the size being offered. Literally, that’s the market.
It might seem like an inconsequential difference. But quoting the bid/ask, and not simply the last price, actually tells you where your order will likely be executed. A stock that shows $35.85as the last price could easily mean that you’d end up buying it near $36.00 or selling it near $35.75 when it actually came time to make the trade.
There’s also often a major difference between the last price and where the market actually might be. For example, consider the difference in the risk/reward characteristics between two stocks, both whose last price was $36.00.
Stock ABidLastAsk$35.75$36.00$36.00size10010,000
Stock BBidLastAsk$36.00$36.00$36.25size10,000100
Stock A has a last price of $36, but a bid price of $35.75 for a measly 100 shares and 10,000 shares offered at $36. So although the last price might be $36, the actual market is, at least for now, weaker than what may appear. For the stock to rise, all 10,000 shares at $36 would have to be bought. With only 100 shares bid 25 cents lower, the market doesn’t show much demand.
Conversely, Stock B might also have a last price of $36, but in this case that’s also where the current bid is for 10,000 shares. The offer is 25 cents higher, with just 100 shares available at this price. Objectively, we can see this is – at least for now – a most bullish scenario.
As we’ve pointed out in the past, one of the greatest advantages of being a smaller trader is the ability to enter or exit the market with virtually zero impact.
Because even individual traders often hold thousands of shares, knowing the market’s size is also important to ensure you use the appropriate order. If you have 5,000 shares of XYZ to sell, for example, and a stock is bid at $35.75 for 100 shares, you’re best advised not to simply unload the entire position using a market order, as you alone are likely to push the price lower, at least temporarily.
Later in the day, for example, you might see a bid for 5,000 shares that would permit you to more easily unload your position without moving the market. Again, it’s a perspective totally lost on those who don’t avail themselves of the actual market prices – the bid and ask.
One thinly traded stock carving out new multimonth highs is Ricoh (RICOY), the electronic document, printing and imaging company that serves both corporate and consumers world-wide. Without much fanfare and crowd attention, Ricoh and similar names such as Canon (CAJ) and Sony (SNE) have powered forward as leading stocks.
In the United States, ADRs trade on the over-the-counter bulletin board, making limit orders a must.
Makin’ CopiesRicoh (RICOY) – 3 years
At the time of writing, Hoenig’s fund held shares of Ricoh.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
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Good stuff from Johathan again. RT @JonathanHoenig: The Stock Quote That Matters Most http://bit.ly/9KMhGf
RT @JonathanHoenig: The Stock Quote That Matters Most http://bit.ly/9KMhGf $SNE $RICOY $CAJ
The Stock Quote That Matters Most http://bit.ly/9KMhGf $SNE $RICOY $CAJ
The Stock Quote That Matters Most: A stock actually has three prices. The most well known and frequently quoted, o... http://bit.ly/cBhraA
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