Spark Global Limited Reports:
The stock market is a continuous two – way auction process.
If you want to sell, you can offer whatever price you want, and when the buyer is willing to pay your asking price, the deal will happen.
If you want to sell immediately, you must accept the buyer’s highest offer at that time.
The reverse is also true for the purchaser of the equation.
In the stock market, we call an offer to buy an “offer” and an offer to sell an “inquiry”.
You might get confused by hearing traders talk about bid/ask prices, but it really refers to the highest price a buyer is willing to pay right now and the lowest price a seller is willing to sell.
What is buying and selling on the stock market?
An offer is an offer to buy at a specified price. A bid is an offer by a seller to sell at a specific price.
Each stock has an order book that records all outstanding orders for that stock, both bought and sold. Let me draw a hypothetical order book
As you can see, a group of buyers’ bids are on the left, and a group of sellers’ asking prices are on the right. You can see at what price buyers and sellers are willing to trade, and how many shares they are willing to buy and sell.
The forces governing buying and selling: supply and demand
The question of whether to trade on the basis of bids or offers boils down to the most basic concept in economics: supply and demand.
We’ll use real estate as a tangible example that we can all relate to. In 2021, the year of this writing, the U.S. housing market is really hot. If you ask a real estate agent about the market right now, they’ll tell you it’s crazy, and it’s a time to sell, not buy.
Often, several people will offer more than the asking price.
The open houses are packed, and many cities are experiencing what San Francisco homebuyers have internalized as part of their lives: having to compete for the right to buy a home. In many cases, buyers are having trouble buying a home, even if they are willing to pay the total asking price, because there are so few homes compared to the number of buyers.
So, given that US homebuyers are currently paying any price, even writing the point where they bid above the asking price, what do you think will happen if you sell low now?
If a house is listed at $300,000 and your bid is $270,000. That’s right, if your realtor tells you that your house eventually sold for $310,000, you’ll be ignored.
On the other hand, when the U.S. housing market collapsed in 2008, real estate investors had a lot of inventory they couldn’t sell. They are over-leveraged and desperately need to sell to recover all possible cash, or even just to reduce their debt burden with the banks.
I’m gonna ask you the same thing. If you wanted to sell your house during the crisis, and you listed your three-bedroom, two-bath house for $200,000 and the equivalent house for $150,000, what do you think would happen?
Again, no one is going to call your realtor, and you’re going to waste their time on their phone during your empty open house.
This is basic supply and demand.