Thursday, May 25, 2006

What is that?

I saw this incredibly odd color on my screen was green.

The major indices had a relatively strong day (Naz and S&P) were up over 1%.
I remembered one thing I learned a few weeks ago and I wanted to share it.
Have you ever had some stocks that just open sharply down and wonder why? I see many people post messages saying it's the specialists ("they are crooks", etc.), but I wanted to explain one particular reason. The stock could go down in after-hours due to some bad news, but there's anothe reason that would be hard for the individual investor to spot.
Let's say there is no news, barely any after hours trading, and yet the stock still opens down 2.5%
What happened?
Here is one reason: suppose a major investor (or even the CEO) wants to sell a big chunk of their holdings. If they try to sell 1 million shares on a stock with an average volume of 300,000- well this is going to take days/weeks for them to get out of the position. Plus, all their selling can drive the price down which is something they do not want. One way to go around this is to call up some institutions. The CEO goes to Goldman Sachs (or whoever) and says "the price right now is $20, I need to sell my 1 million shares and I could go as low as $19.50"
Goldman then starts calling up other big places to drum up some buying interest. Their goal is to find people who are willing to buy the 1 million shares (either one party, or a group of parties) and for doing this they get the discount on the price. So these other big places will buy the shares for 19.50. Now here's the part the individual investor doesn't see: the movement of shares.
This transaction won't show up on the time and sales because of the way it went through. Then most of the time the price will open lower (around 19.50, not necessarily 19.50) for what seems like no apparent reason.

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