Ok now i am confused on how to make a merchant. Do I set the ownership on just the items I want him to sell or what? Also how would I setup a guard that would attack if the player stole something?

To Make a Merchant:
You determine what type of objects he buys and sells and how much bartergold he has on the AI sheet -> services tab of the NPC character.
Arrille e.g. sells all the different types of objects but does not offer training, spellmaking, enchanting, travel or repair. He only sells spells through dialogue. He has 800 bartergold and 0 pocket money.
He always has on his person 5 of the drinks 5 of some ingreds and 2 each of certain scrolls. The scrolls are in his personal inventory but show up in his barter inventory. The spells are in his personal spell collection not in his barter inventory and when they are gone he has no more to sell. He is a level 15 NPC but with a very low 20 in Mercantile skill.
Merchant's will sell items in their personal inventory that match the objects checked in the AI ( If you dont check armour, merchants will wear it if you assign it to their inventory but not sell it ). If you check books and put books in the merchant's personal inventory he will sell those.
If you put items in a chest and assign the ownership of the chest to the merchant, he will only sell those items that he is checked in his AI to sell.
Anything you put in a chest with a merchant's ownership assigned to the chest are the merchant's property even if he does not deal that item.
Put a guard within the alarm distance radius of the merchant ( 2000 game units or 1120 inches ) set the Guards alarm to a middling high value.

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Here are some general rules for New Merchants:
Give them Mercantile and Speechcraft skills above 45 to begin with.
Anything you drag and drop onto them in the character list will be in their personal inventory if it is a class of items they sell it will be in their barterable inventory except for items they equip. A merchant will NOT sell you the clothes he is wearing nor the armour he has equipped nor the weapon. If you give them cash here, that cash is not what they use to barter with.
Merchants equip the best armour they can for the highest armoured skill they have that you BARTER to them....so give them unarmoured and hand to hand if you dont want them wearing and equipping stuff.
Especially helmets.
You determine what type of objects they will sell on the AI tab in their character.
AnyMore than 10K in bartergold is probably a cheat in the making.
The AI is not granular. You cannot make a merchant who only sells lights or only sells pots and pans or only sells daedric weapons by the AI. If you want a granularity of this type it has to be done through dialogue.
You can control the merchant's starting dispostion. Lower starting DISP means harder bargaining. Starting DISP is modified ingame by things like faction membership of the PC, Personality of the PC, Race of the PC, Reputation of the PC, etc. so setting too low a beginning disp can result in service refusals early in the mod and hard slogging bargaining later. If you set your merchants Merc and Speechcraft to 100 or thereabouts do not make them trainers also.
Give them decent clothes to begin with and they will not equip the decent clothes you sell them later if you include clothing among the objects they will buy and sell.
In the AI window if you set his alarm high he will react to PC's rummaging through the unlocked chests and crates and such that he owns.
If the stuff you are giving your merchant is stuff you want him to always have some to trade, give the inventory amount a negative value. Merchants with 15 of an item to sell have 15 over the course of the game when those 15 are gone they do not respawn. Merchants with -15 have 15 everytime the barter window is opened no matter if they sold 15 just 10 seconds ago.
Lock your merchants chests and crates and barrels. Give him the key ( which you will have to make, or not as you see fit ), or not as you see fit.
Here are some not so general rules for existing traders.
Do not drag and drop new items onto existing traders. You can mess up a lot of mods by doing this. Two major examples of this character flaw are Ariele and Jobasha.
If you want existing traders to buy and sell you specific items, create new containers, place your items in the new container, under the extra information about the container set its ownership to the existing merchant. Your items will appear in his barter inventory. Or drag and drop your items into the cell where the merchant is and within the alarm radius ( 2000 game units or 1120 inches or approx 93 feet ) and then double click on your item in the cell window and set the ownership to the existing merchant.
By default, Merchant BarterGold respawns every 24 hours. There is no way to change this for individual merchants only for all merchants at once via a GMST.
Merchants no matter what the skill differences between them and the PC will never offer less than 1 septim for an individual item. This flaw makes powergaming some merchants possible. The only way around it is to not include among the items a merchant will barter anything with a 1 septim ingame value ( ingreds mostly ).
There is no individual way to control how small the "haggle window" for any merchant is, unless you make your merchant do all his bartering through dialogue. There are game settings that do control how much you can haggle the merchant's initial bid or offer up or down before you get a bargain refused notice.
Over the course of play, the higher the merchants disposition becomes, the less he will offer you for things you want to sell, but the haggle window becomes MUCH wider. This is actually logical. The overall economy in MW is based on disposition, the more the merchant likes you the more you like him ( underlying game assumption ) so he expects you will give him the best deal and likewise he will give you the best deal.
Morrowind is a 5 legged horse and merchants and bartering are the undernourished 5th leg.
Hope this is of assistance

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