Definition of Stocks & POP

Popping the cork on stock prices

The initials "POP" related to a stock refers to its public offering price, or asked price--the price a seller is willing to accept from a potential buyer. The "bid price" is the amount buyers are willing to pay for the stock. In a typical trading day, the bid and asked price rise and fall continually until the close of business, only to start the roller coaster all over again on the following business day.

Bid Versus Asked Moves Markets

Emotion drives investors too.

The shifting emotions that influence bid and asked prices are usually what make the stock market move in one direction or the other. If buyers are enthusiastic about a particular stock, its bid price rises, and vice-versa. Although stock prices are constantly in motion, the bid and asked price don't always go in the same direction. The "spread" or difference between the two prices can widen or narrow, reflecting investors' emotions.

IPOs and POPs

Initial offerings are risky.

The first time a stock is offered to the public is called its initial public offering, or IPO. An underwriter working with the company typically determines the initial offering price based on such criteria as the anticipated demand for its product, and economic and business trends. The money collected from investors during the IPO goes to the company, usually to finance product development or expansion. Proceeds from public offerings go from the buyer to the seller.

POPs and NAVs

The POP of a share of a mutual fund is its net asset value (NAV) plus any sales charge. Regardless of whether it's a bond or a stock fund, the NAV of a mutual fund rides up and down with the value of the securities in its portfolio. The NAV and POP never diverge unless the fund is closed-end, when they can go in different directions, causing the shares to sell either at a discount or a premium.

ETF prices

ETFs and mutual funds are similar.

An ETF--exchange traded fund--is a basket of investments not unlike a mutual fund, but these funds typically track an index. They are not actively managed. While the POP of a mutual fund is based on its NAV at the end of each trading day, ETFs trade all day long like shares of common stock. Investors pay brokerage fees to buy or sell ETFs at whatever their market price is at the time of the transaction.

OTC stocks

Unlisted securities are risky.

Stocks traded over the counter (OTC) are not listed on major exchanges like the New York Stock Exchange, usually because the issuer is unable to meet listing requirements. Because they trade infrequently, the spread between the bid and asked price of OTC stocks may be high. When they do trade, brokers negotiate prices directly with one another by computer or phone. Most are "penny stocks," and unlikely to be listed in newspapers.

The maxim "buy low, sell high" holds true for all these marketplaces, as sellers hope to get the highest possible price, while buyers hunt for bargains.

References

• Morning Star: Real-Time Trading Information
• Market Watch: More Real-Time Information

Resources

• Economist: World Economic News and Opinion