Sunday, June 27, 2010

Where did all the money go???

We've seen the markets rise and fall all over again. Sometimes I've asked myself a question : ' When the prices fall, where does all the money go?' I could imagine that 'smart money' left first and somebody made a huge profit (just like in any pyramid scheme). Never really got the time to think about it, until today. Today somebody asked me this question and while trying to explain it all suddenly became clear. The 'money' was never really there. A good illustration are the house prices. Imagine you bought a house for $500k a couple of years ago. The prices have risen since then to 550k, so you've made a virtual profit of 10%. Now the prices fall again and you start loosing 'virtual' money. This is the same as unrealized pnl. The good thing with real estate is that they have some real underlying value, while for the stocks the underlying value is often completely unclear.

Monday, June 7, 2010

Strange things that happen at the open

Each stock has its quoted open price. But how is it formed? I've logged tick data during todays opening  and plotted it in the figure below. Each point represents a tick, the color tick type (ask, bid, trade). Take a note that NYSE opens at 15:30 in my time zone. According to Google finance, the stock opened at $37.5.
As you can see, the opening price jumps all over the place in the first minutes of trading. Seems that traders are not sure of what the fair price is, but it does settle after about one minute.
One conclusion is clear, if you want a stock against its opening price, you got to act fast.