March 27 brings us the Motley Fool Answers podcast's monthly mailbag show, which Alison Southwick and Robert Brokamp dedicate to providing their best advice and insights in response to listener questions.
Our podcasting duet learned something last month: Having Ross Anderson, certified financial planner from Motley Fool Wealth Management -- a sister company of The Motley Fool -- along for the ride makes it so much easier.
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In this segment, they get down to some fundamental ideas that underpin modern markets, including a big one: liquidity. Every transaction needs a buyer and a seller. You'll almost never know who's on the other side, but that doesn't matter. What does is that there is someone, because when there's not, your purchase or sale stalls out. That's where "market makers" come in.
A full transcript follows the video.
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This video was recorded on March 27, 2018.
Alison Southwick: The next question comes to us from Amar. When I sell a stock, who is buying it? How come there's always a buyer when I want to sell?
Ross Anderson: Basically, yes, somebody's buying it.
Robert Brokamp: Right.
Anderson: You won't ever really know who that is, but I looked up the smallest-cap company in the S&P 500, which is News Corp. The ticker is NWS. I'm not recommending it, but I just wanted to see how much it actually trades. The average volume over the last 10 days has been 637,000 shares a day.
So, there's a lot of people trading a lot of stocks. It is possible that if you got into a thinly traded stock or what's sometimes called a pink sheet [which is an over-the-counter traded stock that is not on an exchange], that you could have an order sit out there that doesn't get filled, either to buy or to sell. You could try and buy a stock and not have that availability there.
But for anything that is really a household name or trades on a U.S. index, most of the time there's just enough buying, selling, and liquidity going on that there's always somebody out there. And really, that is the supply and demand curve being expressed in real time that if nobody's willing to buy it at today's price or the current moment's price, it will continue to drift down until somebody is willing to buy it. That's really what you're seeing with daily price fluctuations, and there's a lot of people out there.
Brokamp: And for the really big names, there are people whose jobs it is, essentially, to buy stocks when someone is selling or to do the opposite, and they're the people you see on the trading floors. They're specialists. It's their job to make a market in the biggest-name stocks. As Ross said, with the smaller ones there's no one out there [who has] that job, so you just have to hope you do it. But there are plenty of people out there who make their living buying from you and selling to another person, basically in a split second, and getting a little bit of a commission along the way.
Anderson: One of the traders for Motley Fool Wealth Management -- we have three traders that implement our strategy -- used to be a market maker. He basically sat there all day watching orders come in and go out and taking a tiny haircut on those transactions.
I chatted with him about this before the podcast, and he said there's a lot less of that going on than there used to be. I think the electronics has changed it, but it's certainly fascinating how fast and how much of that goes on.
Southwick: It's funny. When you watch a movie like Trading Places ...
Brokamp: Oh, yeah.
Southwick: ... that's like old Wall Street, where they're yelling. And orange juice futures. And screaming. But when we went and rang the bell for The Motley Fool four or five years ago, it's just a bunch of guys standing around computers. Like half of them look like they just drink coffee and eat sandwiches all day and don't really do that much else. It's not a lot of yelling and waving pieces of paper in the air.
Anderson: A lot of that really exists today for the TV environment. They shoot a lot of TV on the floor of the exchange wanting it to look like it's where the action is happening, but it's not that necessary anymore.
Brokamp: The vast majority is over computers and between institutions.
Alison Southwick has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. Ross Anderson has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.