Prat had an interesting question on how a share price is calculated on the stock exchange at any given point, and his question had more to do with the mechanics of share price calculation, and not on value or demand and supply etc. which is what is commonly talked about.
So, when you see that the price of Infosys is Rs. 2,850 – how was the price calculated at that given time?
The calculation of prices is completely automated, software driven, and anonymous at both BSE and NSE, and the price is calculated by electronically matching bids and offers for a particular share recorded an electronic limit order book (ELOB).
When you place an order to buy a share at a certain price that is called your “bid” and when you place an order to sell your shares at a certain price that’s called your “ask”.
The ELOB contains all the bid – asks for a particular share and the system matches the best bids and asks to execute an order. The price at which a transaction is executed is called the last traded price (LTP) and that’s what you see on TV screens.
From the NSE’s website – let’s take a look at an example ELOB to understand this process.
An example of an order book for a stock at a point in time is detailed below:
|
Buy |
Sell |
||||
|
S.No. |
Quantity |
Price |
Quantity |
Price |
S.No. |
|
1 |
1,000 |
3.50 |
2,000 |
4.00 |
5 |
|
2 |
1,000 |
3.40 |
1,000 |
4.05 |
6 |
|
3 |
2,000 |
3.40 |
500 |
4.20 |
7 |
|
4 |
1,000 |
3.30 |
100 |
4.25 |
8 |
If you look at the above table, the left side are the bids and the right side are the asks. As it stands – there can’t be any transaction because the highest price that the buyers are willing to pay is lower than the lowest price at which the sellers are willing to sell. However, if you come in and put up a market order to buy 3,000 shares – your order will be executed and you will get 2,000 shares at Rs. 4.00 and the remaining 1,000 shares at Rs. 4.05.
Similarly if you wanted to sell 2,000 shares – the first 1,000 will be sold at Rs. 3.50 and the second thousand will be sold at Rs. 3.40.
The exchange gets you the best price that is available at that given time whether you are a buyer or seller and if you have placed limit orders then those orders will not be executed as long as someone matches that on the other side of the transaction.
At a high level, matching the bids and asks on a stock based on the volume at that time determines the stock price. I’m sure there are a lot of intricacies in this system, but I’m unable to write about them because I’m not familiar with them myself. If you have a link that goes deeper than this then please do leave a comment.
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Hi Manshu,
Thanks for this articles.I have a question for you.
When we sell or buy any shares, do you mean it fluctuate a bit from the current share price listed on the stock exchange? Or is it the exact amount that we will get if sold or buy at the same rate?
Cheers,
Hi Freddie,
When you buy or sell, you get what the market is offering at that point but then your trade influences the future price. I’m not sure if Im answering the question you had in mind, or if you were asking something else. Are you more interested in the mechanics of this theoretically or how this is practically done?
Thanks for this Informative Article. After reading this artical i was just wondering that if share price really change this way then how company’s profit or loss can affact to share price. Also, is there any link between sensex value change to individual share price?
BSE takes 30 companies (every time not the same companies) and based on their shares values apply some formulae and calculate sensex which is just an index to see the overall situation of the market. So individual value of shares affect sensex value but its not necessary that if sensex goes down all company’s share prices go down.
thank you..
thanks for the article
well explained,cleared most of my doubts
Awesome article dude.Thanks
didn’t understand thoroughly
….may u pls elaborate….the stock,market ,share price system..??
Nice. Very Informative Article
Thanks a Lot..!..This is the answer i was looking for…i tried to google a lot to find this..everybody kept saying demand and supply decides the market price..But thats the theory of
stock price..I wanted to know the mechanism which follows that theory..and got it here…This is wonderful..
Many Thanks mate, Very informative regarding stock price game! Keep up good work
I have 100 share of reliance Industrise at the time of Harshad Mehta i am intrested to sell them fell free to contact me– [email protected]
On last friday (20th April’12 ) i purchased 5 e-silver in NSEL @Rs.5703.00 around 10.20 A.M in anticipation of make a profit of around Rs.250/- on interday basis as silver price fluctaues very much. On that day it was very stable and traded in the tight range in between 5685 -5720. around 11 PM ,there is no improvement and i want to sell it at any cost to avoid big deilvery chrage . Suddenly Sell price flashed at 5750 and buy price at 5709 but no trading is being taken place. As per the information provided in this post , I had made a sale bid of Rs. 5725 and my bid is shown at top and within 5 second it is executed
So we may take the advantage of such situation where a big gap between sale and buy price is there, I have selected one such stocks for tommorow trade which is Wyth where spread between sale and buy price is always there and volume of trade never goes beyond 5K
That’s an interesting real life example Santonu – thanks for sharing.
if the bid=ask or ask=bid (price) then exchange’ll execute the order, or else exchange’ll simply wait. sell or buy in exchange is a computer program that’ll get executed only when both bid and ask numbers’ll match.
and if someone wants to buy at Rs. 4 and someone wants to sell at Rs. 3.50, then exchange’ll take lowest possible price ie: 3.50..
Thanks Prasad for the pointer about the lowest price, it sounds correct, and may I ask you the source for that info? – Thanks!
Wondering at what price the transaction would take place if someone wants to buy at Rs. 4 and someone wants to sell at Rs. 3.50.. whose interest does the exchange take into consideration – the buyer or the seller?
The exchange doesn’t favor either the buyer or seller; it will try to find the best match for both people and normally there won’t be such a big spread for a share with decent volumes.
I’m unable to think of what will happen if there is only one buyer and seller and both placed the order for exactly the same volume at exactly the same point in time. Perhaps, the exchange will average the price but I don’t know for sure. In other cases, the volumes and timing will make a difference on what price will be executed. Perhaps someone who knows more than me can respond to this query.
Can’t say I know more but in the case of 1 buyer and 1 seller asking/bidding for different prices there would simply be no trade and a gap would appear in the stock chart. This often happens after big news where earnings are a lot more/less than expected and then suddenly no one is willing to buy/sale at the current price causing a gap until somone agrees a price.
Very interesting. Thanks Manshu, I seem to have learnt so many things from your posts over a period of time. Sometimes, people get surprised that I know so many things about finance, stocks etc, thaks to your posts. You put complicated things in such simplified terms making it very easy for a anyone to understand.
I too was wodering the same thing as PP. This is what Harshad Mehta or some others did to rig the stock market and gain from it.
Thanks Hema – that’s the most wonderful comment in a very very long time 🙂 You made my day.
Perhaps, a good idea for a post to see how manipulators rig the market. You have to have a large group of people who already own a large number of shares, and act in collusion buying and selling and driving the price up artificially.
I have been a professional planner for 30+ years. I look at the charts and the movement is too regular. I suspect that large volume trader’s computers are setting the bulk of the patterns we see. This is not human driven though there is indeed a human element.
If the share prices that we see on TV are just the last traded prices (and not some sort of a weighted average), wouldn’t it be very easy to influence the share price? For example, I’m director of company XYZ and the last traded price of XYZ’s share is Rs. 100. If I go ahead and place an order of a share at Rs. 200 (assuming I can afford losing Rs. 100), wouldn’t it reflect on the TV screen that XYZ share is trading at 100% growth and that way I can attract investors towards XYZ shares?
I’m sure it is not that simple, but just wanted to understand how.
Yes, you’re right, the last traded price is the price at which the last transaction takes place, and to determine the price at which the last transaction takes place, the volume does come into play because if there are a large number of sellers and few buyers then that will push the price downwards and something that you can see happen in price action of stocks that go down very sharply very quickly.
Correct me if I am wrong but wouldn’t it be more the case that your order to buy at 200 would fail as they would just sell to you at the best possible price (nearer 100) and the only way to get the price to 200 would be for more buyers to appear than sellers forcing the price up to the point where buyers drop out and the 2 are matched.
@manshu
Such a rare information . I never thought about it before . Thanks .
Thanks – I though there would be a lot more info on this than there was, in fact I’d like to expand this to include everything that PP has asked, but I need to find someone who knows about this first.
when an order to buy or sell is placed, there is an option in the order window to disclose a quantity not less than 10% of the total order quantity intended to be bought or sold. For eg, if you want to buy(or sell) 100 shares of a particular company you can place the order such that the quantity revealed in the ELOB is just 10(or more like, 15, 20, 30, 50, but not less than 10)
What will be the scenario if say there is no bid or ask (limit order) but everyone wants to trade at market price.
Moreover in my opinion,movement of the stock also determined by the stock liquidity. More the stock liquidity less will be its movement
For the first part – in this hypothetical situation – the answer depends on the number of buyers and sellers. If there are equal number of buyers and sellers then the price won’t change at all and will continue to trade at the last traded price. However, if there are more buyers than sellers, then they will eventually bid up prices, and vice versa.
For the second part of your question – yeah that’s right you will need a lot more volumes to make the price difference of ten rupees in a stock which has volumes of lakhs of crores as opposed to a stock that has only a few thousand trades.
Thanks a lot for your valuable feedback
Never thought about it -so good to know. I really appreciate and have tried to imbibe you linking to other posts or website. The link to NSE website is simply superb. Hats off for explaining in simple terms.
Links are the currency of the web they say and I try to link as much as possible and always when I’ve taken some info from somewhere and want to credit them.
Thanks! Really appreciate your effort here. This is very helpful, and cleared all the obscurities in my head.
Thank you very much…good one to understand…