The last trader makes the market that's who. Think about the fact that most shares of any stock are not available. They are not for sale. Naturally rapid escalation in a stock's value does bring more shares to the market, but in general most are not for sale on any given day. In particular, stocks in the Standard & Poors 500 are part of an index that many funds must hold as part of their agreements with their customers.
Some of my older stock holdings include Harley Davidson (NYSE: HOG), Intuitive Surgical (NASDAQ: ISRG) and Johnson & Johnson (NYSE: JNJ). I did not buy them for short term gains and do not anticipate selling any time soon. In the case of JNJ, one of the most widely held stocks and most respected companies in the world over the last hundred years, there are a large number of people, pension funds and investment managers that feel the same way.
Sometimes it is not even day traders or 'market makers' that are the last trade. It might be a promise to trade as with options. Here is another interesting thing to think about. If on a given day 5% of a stock is traded down than 95% of the shareholders lose value and had no say. The next day they are traded back up and again 95% of the shareholders are just along for the ride. The stock quotes you read are set by the minority, not the majority of shareholders.
To me investing is always long-term based on value. Short term it is gamesmanship. This has even deeper meaning with thinly traded stocks which further exagerate short term pricing and is one reason to stay away from these type of securities which may have greater volatility. To the degee that investment houses control large blocks of stock and also advise on same you can't help but wonder, not when, but how often something goes astray. But these too are short term events. The short term trading also reflects a lot of guessing about the market. So, while the last trade makes the market, or sets the price, the long term investor seeking value usually does receive value over time as appreciation is swayed by facts.
Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well.
Sheldon Liber is the CEO of a small private investment company and the Principal for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.
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