Quote:
Originally Posted by moneymatters
This is the one thing that confuses me and that I have had no luck whatsoever in locating any information on.
If a company has a limited number of stocks, what happens if more people want to buy it than there are stocks available? And when someone "sells" their stock, who buys it?
What I mean is if a company has 1,000 shares, and all of those shares are purchased, can I just call up a broker and say "Hey, I want to buy a share"? And if so, where does it come from? If not, how do you know if there are shares available? And what if I want to sell my share? Where does it go? Is it possible to have shares that you want to sell but not be able to sell them?
|
First of all, there are market makers either trading electronically or those guys standing there at the exchange floors. Market makers are the guys setting the prices (bid and ask). Here's one important thing, they also have shares of that stock and must sell their own positions when no one else wants to sell. Of course, the easiest way to get someone to sell their shares is to raise the prices. That's how we get our up ticks and down ticks.
By the way, just because the company shows a float of 1000 shares doesn't mean they only have 1000 shares. You've got to remember that market makers will have additional shares that can be sold to the retail traders when needed. Of course, we'd be getting away from the subject if I add the aspect of how market makers hedge their positions. And those market makers are usually employees of large investment funds. Hope that helps.
On the sell side, say I wanted to sell my 100 shares of ABC, and there's no outside buyer, the market maker will have to buy my shares at the bid price. Ever notice why there are large spreads for thinly traded stocks? Let's say stock ABC only has 50000 shares traded daily. The bid price for ABC will probably be at $30.25 and the ask price at $30.75. Now, I sell my 100 shares of ABC to the market maker at $30.25. What he can now do is try to sell that same 100 sh. to someone else at $30.75. He also has a $0.50 leverage. If no one buys at $30.75, then he can lower to $30.50, and someone waiting on the other side will certainly buy it at $30.50. It's a win/win/win situation for everyone. I got rid of my shares, the buyer bought it for $0.25 less, and the market maker made $0.50 on the entire transaction. Getting too long
