How stock is priced?

This post is intended to show the reader how stock is priced in stock market (or Bursa Saham in Malaysia). 

Basically, 

Stock price recorded is the price of last transaction in the market. 

In every transaction, there must be a willing buyer and a willing seller, else no transaction would happen. 

In other words, the stock price will be set, when there is at least one willing buyer and one willing seller to transact at that particular price. 

Everyday, participants for the stock market will give order to their brokers regarding how much, and at what price level they want to sell/buy a particular stock. As a results, a summary of buy/sell order will be listed on the trading screen as shown in figure below. In the left column you will see a summary of quantity bid at particular price level, in the right column you will see a summary of quantity offer at particular price level. 

Hence, from the figure, 33 lots bid at RM. 3.56 means that the buyers collectively willing to buy 3300 shares of the stock (MNRB) at RM 3.56. Similarly, 64  lots offer at 3.58 means that the seller collectively willing to offer 6400 shares of the stock at RM 3.58. 

As nobody are bidding/offer at RM3.57, no new transaction will occur. A new transaction will occur, either if the seller accept a lower price (RM3.56), or the buyer willing to pay for higher price (RM.3.58). 

The implications are as below:

i. The price will likely go down when there are more sellers than buyers, and likely go up when there are more buyers than sellers. 

ii. How much the price will go down, depends on how much the seller willing to accept for the shares, during the economy crisis, as stock holders eager to cash in their stocks, thus a market "crash" (stock price fall sharply) is more likely. 

iii. How much the price will go up, depends on how much the buyer willing to pay for the shares, during bull's market, when everyone believe that one particular stock will rise to double or triple level of current price level, they will bid for the stock for higher price. Thus a sharp rise. 

iv. This means that, current stock price is not reflective on the actual value of the underlying company. Instead, what stock price reflect is the expectations of the stock market participant. 

v. And, the stock price level is actually determine by the participants which is less than 0.2% of the total shareholders only. ( for example, Bursa Saham Market Capitalization for year 2012 is 1466 billion, while the average daily trading value is 1.666 billion only. )

Hence, the advice to gain in stock market, dont follow the trend, especially if the trend is only  less than 0.2% of the market participants.