In movies, when they show the stock exchange there are always dozens of people in there, yelling and writing stuff down and yelling some more. Who are they yelling to? What is the purpose? What exactly are they writing down? I believe that software day trading is a way for people to exchange stocks in microtransactions without physically being on the floor, but what about in the days before day-trading software existed?
I really don’t know anything about stocks. Please explain this in terms that a 12 year old could understand
As an aside, I always wondered what happens to stocks that people want to sell but nobody else wants to buy. Does the company itself just buy it back and issue the cash? What would happen if everybody were to sell their shares of, say, Microsoft at the same time? Would that bankrupt the company?
In addition to Mr. Galbraith’s musings below, your narrowly focusing on publicly-available, exchange traded stocks. That is a small (numerical, not value) portion of the total stock of all companies in existence.
For shares which are not traded on exchanges, they either have extremely low selling prices (so that someone will take a gamble), they’re closely-held (i.e. not publicly traded, and can’t be), or they never make it into IPO (i.e. an investment banker isn’t going to be willing to put up the funds for the first chunk of shares and make the market)
As for share buy backs, yes, if the company has excess cash floating around, they can (and often do, either to capture some undervaluation in the market, or to pump up the stock price a bit) buy shares back on the open market.
No, shares do not affect the income stream of the company, usually (there could be some wonky preferred shares or warrants out there that, if turned in, could cause cash shortages at the company). Share trading is the first step removed from operation of the company. Share price may have an effect on the credit worthiness of the company, especially if the company is financing with preferred stock, and the share price may very well signal an underlying business issue with the company (i.e. share prices don’t (normally) take that big a nosedive unless there is something seriously wrong with the financials of the company).
However, if the price does crater and craters that severely, there will be a point where the book assets of the company are worth more than what 100% of the outstanding stock costs. Someone will come along and buy the entire company up at that point just to break it up and sell the assets and make money if no one else, to that point, has already bought a severely undervalued future stream of income (i.e. the company’s future performance, which is what a share is, in essence)
Computerized trading has largely replaced floor trading, as it is faster, easier to track, and more responsive to the increasingly volatile trading environment, especially in commodities. When they are active, they are taking orders from buyers or brokers for buy or sell orders and negotiating with other floor traders or floor brokers. They’re not permitted to buy or sell outside the market floor, so their options are more limited than electronic trading which can actually trade across exchanges.
What happens to stocks or commodities that no one wants to buy? The owner of record has to keep them. In the case of an IPO, the company technically holds the paper against cash reserves or credit, though they can always issue an order to themselves to buy back the paper “at market” (which, if no one is buying, can be a nominal monetary value of fractional cents). It is rare that this happens because companies typically do a lot of studying of the market to determine the market demand for an IPO and undersell in order to drive up the value of the stock and therefore the perceived value of the company, which is of benefit to the board members and other execs who hold preferred stock or stock options.
While the individual exchanges are typically private and usually for-profit companies that jealously guard their particular market space, the prestige of being traded on a particular market like the NYSE has less of a draw than the opportunity for round the clock trading, and the individual exchanges are slowly being absorbed into larger collective exchanges like NYSE Euronext and ONX. In a decade or two independent exchanges will very likely no longer exist, and trading floors will be an anachronism to children watching that old flat-film classic, Trading Spaces with that wacky Disney family movie icon Eddie Murphy and that tall fat guy, Dan Ackroyd. What?!?
The people standing beside the kiosks filled with electronics are known as “specialists.” Each specialist specializes in trading a particular stock. People come up to them with orders and the match buyers with sellers.
Thus, if the trader specializes in GE (they all have multiple stocks), someone may bring an offer to buy 100 shares at $20. Someone else would bring an order to sell 100 shares at $20. The specialist matches the two and makes the sale.
That’s a vast over simplification. The two prices are never the same; the specialist prices them so he gets the difference. The seller might get $19.90 and the buyer $20.10. The specialist gets that 20 cents per share (numbers are just for example; not real world examples). On 100 shares, that’s $20. He will do hundreds of trades a day, so it’s quite lucrative.
OTOH, the specialist needs to make a market in that stock (which is the answer to the questions in your third paragraph). If someone wants to buy but there are no sellers, then the specialist sells the stock out of his own holdings. Similarly, if everyone is selling, he is required to buy. He could lose a lot of money if the stock is tanking.
That description is pretty accurate, but about a decade out of date. The NYSE specialist system is almost completely obsolete and most specialist firms have gone out of business. Only a fraction of trading volume of stocks listed on the NYSE is traded through the NYSE, and an even smaller fraction is ever traded by a human. Only during times of large order imbalances on the NYSE will a human specialist have anything to do with trading. And even then, the stock will continue to trade live on other electronic venues.