Eli5: when somebody dumps a million dollars into a stock why does the price not temporarily skyrocket?

367 views

Title!

In: Economics

A million dollar stock purchase of a company worth billions isn’t really that much. It likely happens every day with purchases by various hedge funds, institutional investors, etc.

But what can happen, is the price of a stock can increase when a high profile investor purchases shares – someone like Warren Buffet for example. However, this is likely more due to the fact that Buffet investing in a company can be seen as a sign that if he thinks it’s worth investing in a company, there must be something good about. Even then, it’s probably less about the actual purchase of shares.

It’s possible that it could, depending on how the order is placed, how large the company is, and how actively it’s being traded.

But, you would be pretty foolish to place an order that large as a market order (“buy at whatever price the market will bear”) versus a limit order (“I’ll buy these at this specific price”). For most publicly traded stocks, a million dollars isn’t very significant.

There are ways to buy a large amount of stock without disrupting the market. What commonly happens is that the purchase isn’t made all at once. Instead, they divide that purchase over a period of time. That is one strategy.

Two things; a million dollars for a large company might not represent a large portion of the shares and for someone to buy someone else must be selling, so why are there that many shares available to purchase?