In the previous post: Bid-Offer in the Stock Market - Part I, I explained about bid and offer in the stock market. The transaction mechanism in the stock market is based on price priority and time priority. What is the logic of the two? Check out my post below.
Before that, you need to understand the concept of the law of market supply and demand first:
If demand > supply --> the price of goods (stocks) will increase.
If supply > demand --> the price of goods (stocks) will fall.
PRICE PRIORITY
Price priority is a queue of stock orders based on price priority. What does it mean? For more details, see the description of price priority in online trading software as follows.
Pay attention to the bid price and offer price on shares of PT Indofood Tbk (INDF). The top bid price of IDR 7,100 is the most prioritized price. Likewise, the offer price of IDR 7,125 is the most prioritized offer price. Why is that?
OFFER PRICE VS BUYER
I will start with the offer price (the people who set the selling price --> offer their shares to the buyer for sale). Well, referring to the queue above, now there are 5 people who have goods of the same quality. The name of the item is INDF stock. Take a good look..
1. Seller 1 offers the goods at a price of Rp. 7,125.
2. Seller 2 offers his goods at a price of Rp. 7,150.
3. Seller 3 offers his goods at a price of Rp. 7,175
4. Seller 4 offers his goods at a price of IDR 7,200
5. Seller 5 offers his goods at a price of Rp. 7,225.
Actually there is still the sixth, seventh and so on who do the queue. But usually, online trading software does not display the entire buy and sell queue. Maybe the goal is not to burden the application. For example, if you place an order at 7,250, your queue will not appear in the software.
How does price priority work in a stock trading system?
Seller 1 ranks first, aka prioritized first. Why? Because seller 1 is willing to sell shares at the cheapest price among other sellers. It will automatically benefit buyers who want to buy INDF shares, because buyers only need to spend 7,125 to buy INDF and do not need to spend more money (7,150, 7,175 and so on).
To make this logic easier, I will give you illustrations and questions:
After receiving THR, you decide to buy so sweet chocolate brand (INDF Shares) in large quantities. You enter supermarket A and see that the price of chocolate is 7,200. Because you feel the price is expensive, you go to another supermarket, supermarket B and the price of chocolate in supermarket B is 7,175. You intend to look for a cheaper price. Supermarket C turned out to be 7,225 more expensive. You enter supermarket D and find the price of chocolate is only 7,125. Then you go back to supermarket E, it turns out that the price of chocolate is more expensive than supermarket D, which is 7,150.
Now the question is, if you find an item with the same brand and the same quality, produced in the same company, namely chocolate so sweet, then you are offered a choice of prices: 7.125, 7.150, 7.175, 7200, 7.225. Which price do you choose to buy?
"7.125", you say.
If you choose 7125, that choice is the most rational choice.
In other words, you must rationally choose goods with the same quality but at the lowest price. That's why 7.125 is said to be the BEST OFFER. Because the seller is able to sell the same item to the buyer at the CHEAPEST price among other sellers.
Back again to the previous bid-offer explanation. So, let's say you want to buy shares at the best offer price, 7.125, then you don't need to queue. This means that your purchase order will be processed immediately and you will immediately deal with seller 1. Then, when will seller 2 and so on, the goods can be sold? This can happen if there are a lot of buying requests, so the goods offered by seller 1 with the best price of 7.125 run out. So that automatically the price of 7150 becomes the best offer. Meanwhile, because the price of 7,125 will shift to the best bid price.
Let's say it turns out that you judge that the price of 7125 is too expensive, you want to buy it at a cheaper price, which is 7,100. You can buy at a price of 7,100, but you can't directly deal with the seller. You must be willing to queue at the bid price (see the Bid-Offer image as shown in the image above).
Why queue at the bid price? Ask you
The bid price is the place where people want to make a BUY DEMAND. And every buyer in general would want to buy goods at a cheaper price even the cheapest. So if you want to buy at a lower price, you have to queue at the bid price. If you put up a queue at a price of 7,100, your order can be matched if there are many who sell goods at a price of 7,100 (many selling offers), so that the price of 7,100 runs out and the price of 7,100 shifts to the offer price, aka the stock price drops due to supply pressure, so Your order can be dealt when the price drops to 7,100.
BID PRICE VS SELLER
After you understand the price priority from the offer price side, now I will discuss it from the bid price side. Bid price is a collection of buying prices from people who want to buy shares at a certain price. In the example above, there are 5 bid prices displayed:
1. Buyer 1 asks for goods at a price of 7,100
2. Buyer 2 asks for goods at a price of 7,075
3. Buyer 3 asks for goods at a price of 7,050
4. Buyer 4 asks for goods at a price of 7,025
5. Buyer 5 asks for goods at a price of 7,000
Buyer 1 ranks first, aka prioritized in buying and selling INDF shares. Why? Because buyer 1 is willing to buy shares at the most expensive price among other buyers. Buyer 1 will give a profit to the seller. Sellers certainly want to reap the maximum profit from the goods they offer.
So, if you sell an item to buyer 1 at a price of 7,100, then you don't need to queue. Your order will immediately deal / match. So, when buyers 2 and so on can the goods be sold? This happens when there are many selling offers, which causes the asking price of buyer 1 at a price of 7,100 to be sold out. So, the price of 7,075 will automatically be the best bid price. The price of 7,100 that has been sold out will shift to the offer price (the stock price drops due to the number of offers).
Dude Heze, what if I don't want to sell directly at 7,100, the price is not high enough? Want bigger money
If you don't want to sell at 7,100 you can sell at a higher price, let's say you want to sell at 7,175, you have to queue at the offer price (where people want to sell shares at a certain price), your order can be dealt with by the buyer if there is a lot of demand buy, so the price of 7.175 becomes the best bid price.
Why do I have to queue up at the offer price if I want to sell at a high price?
Offer is where people want to sell shares. The seller certainly wants to be able to sell at a high or even the highest price. So, if you want to sell at a high price, you have to queue at the offer price.
So, if I summarize a bit, the above buy and sell orders can all happen because of the PRICE PRIORITY concept. If there is a price priority, then there is also a time priority. Please read the post: Bid-Offer in the Stock Market - Part III.
