Shares can only be traded on the stock market, where buyers and sellers are present, provided both parties agree on a common price. This price, according to both parties, indicates the asset intrinsic value. Eventually, a price is assumed to be the last transacted price of a share when both parties agree on it and trade takes place.
How is LTP determined?
Every stock market transaction requires these three parties in order to take place:
- Buyers of stocks at auction
- Selling stock: Interested parties
- The Exchange that makes trades possible
The present owner of the shares provides a selling price, also known as the ask price, during market trading hours, but there are also others willing to purchase the stock with a bid price. Being a third party, the Exchange only permits the trade to go through when the ask price and the bid price are in agreement. The LTP computation for that particular period is based on the price at which the trade actually took place.
Let us use an example to try to grasp this. Let us imagine a seller wishes to sell a share of business A for Rs. 800. Thus,
Demand: Rs. 800.
A buyer may be willing to pay Rs. 775 in order to purchase a stock with the highest price. Thus,
Bid Price: 775 rupees
But, because the Ask price and the Bid price disagree, no deal is made at this specific moment. But, a new seller later in the day enters the market and offers to sell the shares for Rs. 775. Thus,
New Ask: 775 rupees.
This price is referred to as the traded price because it is where successful trades take place.
Throughout the course of a trading session, thousands of trades may take place on the stock market. As a result, the trade price of stocks with high liquidity fluctuates based on supply and demand. The last traded price, or LTP, in this case, refers to the price at which the stock was last traded.
Volume Impact on LTP
The market liquidity of a share can be a key factor in determining stock volatility. In such a case, the closing price is more likely to be stable if there is substantial volume trading of the stock at the price in question. As a result, sellers sometimes sell their stocks significantly closer to the ask price, while buyers frequently bid close to the real bid.
It is far more challenging for a buyer and seller to obtain the bid/ask price they may have desired when a stock liquidity is low. If a transaction takes place, there is always a chance that the price at which they buy or sell will be significantly lower or higher than the intrinsic value they may assign to that specific stock.
Difference between the last trading price and the closing price
While one might assume that the last traded price and the stock closing price should match, this is not always the case. The closing price is the average of all share prices traded on the Exchange between 3:00 and 3:30, whereas LTP is the price at which a share was last actually traded.
However, there is a chance that the Last Traded Price and the Closing Price will be the same if there has not been a trade in the previous half-hour. In this case, the Last Traded Price becomes the Closing Price for that particular session. Yet it is important to understand LTP since it frequently serves as the foundation price for ask and bid prices for equities that traders might be prepared to trade.
Conclusion
Though all these technicalities may seem intimidating to a novice, stock trading is not a difficult thing to do. For beginners, it is always better to get help and guidance by experts. Nifty Trading Academy aims to bridge the gap between trading knowledge and practical trading. Contact us to learn trading like a pro.