eli5 why does stock value drop when stock is sold?

Question

if someone else has to buy your stock when you sell it, isn’t stock being bought at the same time as it being sold?

In: Economics

Answer 1

Let’s say you and a group of people want to buy stock, but no one is selling. So I stead you basically place an order for the future. You publicize your intent to buy some amount of stock at a given price. And so do the other people.

But because you’re individuals with different appetites for profit, tolerances for risk, and desired timelines, you’ll be asking for different prices.

Now introduce the sellers, they come in, see your buy orders, and fill them. Naturally they’ll fill the buy orders offering the most money first. But as those orders are filled, the cheaper ones become active.

So, quite literally, as more people sell, the cheaper the stock gets because the buy orders are filled high to low.

Another way this can happen is on the other side.

As you can have buy orders described above, you can have sell orders too. And as buy orders are filled high to low, sell orders are filled low to high. If a lot of people want to sell on short time frames, then they’ll want their sell orders to be the first to be filled, meaning they have to be cheaper than everyone else.

So as more people want to sell, the sell orders get cheaper and cheaper.