When people talk about "the market", they usually have more than one idea in their heads. The reason is that the "market" comprises a wide range of financial services, products and instruments, each of which involves an overwhelming variety of risks and opportunities.
That is also the reason that some news ends with phrases like "and stocks went up (or down) so much and so much" indicating the confidence or volatility of the market.
Simply put, "the market" is where businesses, raw materials, and services are bought and sold. From business actions, which allow you to acquire small pieces of companies and whose value rises or falls (sometimes as a result of good or bad economic news or the company itself).
Bonds, which are more like notes, have a fixed repayment date and generally greater security. That said, there are also exchange-traded funds (ETFs), derivatives, currencies, and many other more sophisticated products. We will talk about these later, in other posts, we will go by parts.
Whatever you want to buy or sell, the market is the meeting point for sellers and buyers. Sometimes it is an electronic market and under the same roof, like the London Stock Exchange for example. It can also be an over the counter (OTC) market.
The over-the-counter market has fewer rules and may not have a physical location. Much of the problems that occurred in the financial markets between 2007 and 2008 arose from high-risk over-the-counter products.
One of the most striking aspects of the market is the language. Sometimes it seems that the world of financial markets has its own dictionary and communicates in strange jargon. Although companies like "up" or "trend" are easy to understand, there are other terms that require a little exploration.
The differential, for example, is one of these terms. The simplest answer is that "the spread" is the difference between the purchase price and the sale price. Imagine a home seller who makes his profit from the difference between the price he is offering you for your old house and the price he charges the new owner to whom he is selling it.
That said, in practice the term "differential" can have several more subtle meanings, it can also be said that there is a demand and supply differential on which some negotiations are based. The "ask" price is the maximum price that a buyer says he is willing to pay and on the other hand the "offer" price is the price at which the seller expects to sell. Between these two figures, an agreed price is usually reached.
The spread is almost always fluctuating as a result of the reactions of buyers and sellers to the information they receive. For example, sometimes it is spoken of the "spread" of the price of some actions during a period of quotation, be it a week or three days. "The spread on X shares was smaller than expected."
Keep in mind that stocks with little volume can have a wider spread, since buying and selling operations tend to be less frequent. In some cases, the difference between supply and demand does not usually vary much, this happens more often with those stocks that have solid credentials and a performance that (almost always) is stable.
If you want to buy and sell the same day, the spread between supply and demand is vital, since that margin can have a direct effect on your daily income. This is very well known by operators who are dedicated to "scalping". We will see it in the following Post.
Also and almost to finish, it is important to remember that if you are looking at the price of some shares on a website, that information actually corresponds to the price that was paid for them the last time. If you play it and buy it, you can end up paying a higher or lower price for them. That is why it is important to know how "live" are the platforms we use and how well they respond to different exchanges worldwide.
What information does the differential let us know? Although there is a lot of information after studying the differential, we are only going to name four so as not to make the longest post.
The availability of a share, if we pay attention, we can see how widely and easily the shares of a company are marketed.
The volume, for this we must see if a certain amount of shares change hands quickly.
The popularity of the shares, the most quoted can have a wider differential.
Market volatility is one of the most important aspects that allows us to study the differential, we must study and be attentive if the good or bad news of the economic aspects of X company, affects in any way the stability of the market.
To conclude, it must be said that in recent years the differential between supply and demand has narrowed considerably, which makes the job of stock market operators a bit more complex. All this due to the technological advances that allow anyone from home to perform micro operations from home, which considerably modifies the aspects that we said earlier.
Thank you for reading :D