One Fool explains why he pays little heed to reported trade data for shares.
I've often seen discussion board posters say things like: "There were 18 buys today and only 2 sells in JamTomorrow Technologies, but the price fell 10p. Market makers are playing games again."
And every time I read such comments, I sigh. Here's why.
I think the reason why some private investors are so keen on trades data is because every share trade must be reported to the market at some stage. It's easy to obtain this data from a website, so private investors think they're on a level playing field with the City big boys.
The theory is that you can see that some trades are "buys" and others are "sells." If you can see lots of buys, the share price should be rising and possibly set to rise further.
Imagine that JamTomorrow's share price is currently 110p, and the bid-offer spread is 108p to 112p. That means you can buy shares in JamTomorrow at 112p and sell them at 108p. And if you use a half decent broker, you should be able to get better prices at that moment. So if a deal is reported at 111p, many people assume that a deal was a "buy", but if the deal was at 109p, it was a "sell."
Some websites try to help by annotating most trades with a "buy" or "sell" comment. Snag is, these websites don't know for sure whether the trades are buys or sells, and you can never be completely certain about the status of a trade unless it was one of your own.
There are several explanations for this but I think the most important is that the reporting of big trades can be delayed. If an institution wants to buy a big chunk of shares in a company, it can privately inform the stock exchange at the start of the purchase, buy the shares in batches over a period of days, and only report to the market once the entire purchase has been completed.
Another point is that, for many shares, not all trades now go through the LSE. Some are traded via the rival Plus system operated by Plus Markets
(LSE: PMK)
, so you have to do more detective work to get a fuller picture of what is going on.
I think it's very hard to draw any firm conclusions from trade data. I accept that some very experienced or skilful traders may be able to make money from this, but I don't think it's time well spent for most of us.
It makes much more sense to me to try and study the fundamentals of a share and decide whether the company concerned will be a long-term winner. And if you want to do more than that, I think examining the portfolios of top-performing fund managers is a much more constructive pastime.
Of course, if you don't have the time to do detailed research into company fundamentals, we can do it for you. Take a free 30-day trial to our online share-tipping service, Champion Shares.
