Monday, May 18, 2009

Does CNBC Know What A Bid and Ask Are?

Squawk Box: Sometimes I Wonder

Breaking News Friday morning: JCP (J.C. Penney) earnings beat for the quarter and it lowers guidance for the next quarter and for the full year.

Now this is bad news, so you would expect the stock to drop. It closed at $26.65. If a stock does not drop on bad news, or drops only slightly, that is eye candy for a trader.

The anchors of this show are Joe Kernen, Becky Quick and Carl Quintanilla, and at different times if you watch the show long enough (as I have) you have to seriously question their level of knowledge on various topics, even though they have been on the channel for quite some time.

The Slippery Slope of the Stock Market

The initial JCP move in the third market (the institutional market which trades before, during and after the New York, American and NASDQ exchanges open at 9:30)was $21.50 bid, $27.50 offer. Now New York Stock Exchange stocks tend to be inactive and illiquid during the pre and post market trading sessions which means the bid ask spread will tend to be very wide, volume low and a trader has to trade there with caution.

For some basic background, the offer is the price where an owner of the stock wants to sell it, and the bid is the price where a buyer wants to buy it.

A seller could conceivably put their offer to sell a stock that is trading $30.00 at $1,000 and it would be irrelevant because it would be out of the market. You can say you want to sell, but that doesn't mean that you will.

A buyer could put a bid for the same $30.00 stock at $.01 and it would be irrelevant because it is out of the market. You can bid to buy a stock at any price you want, but that doesn't mean that you will.

When the initial bid/ask spread on JCP was $21.50/$27.50, Becky said that someone must reporting the earnings news incorrectly because the offer price of $27.50 was above the close. Remember that offer does not matter unless someone takes it. As the owner of a stock you can offer it at any price, but unless someone is willing to pay that price you are out of the market.

Now had the bid, or the price that someone was willing to pay for the stock been at or above the closing price of $26.65, that would have indicated that the story was being read wrong or that there was more to the story because now someone is willing to pay more that the prior days close. That would look something like this: $27.00/$27.50.

The fact is that the bid/ask spread was initially in the range of $23.00/$25.50. The offer, or the price someone is willing to sell their stock at was below the previous days close indicating the fact that the story was being read exactly right. It was negative and a seller was willing to take a loss from the closing price.

This hopefully makes some sense, but the point is that investors need to understand what is happening and the way that markets work, because in many instances the "experts" on television do not and are not.

4 comments :

  1. then why aren't you on t.v. mike?

    ReplyDelete
  2. Love your blog! Lots of great info and content here! Keep up the great work! :D

    ReplyDelete

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