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
They don’t. It is a consequence of Arbitrage and reverse auction dynamics, or in short, supply and demand dynamics.
Lets say I have a widget I want to sell so I offer to sell it for $100.
Now there is a buyer that wants to buy a widget but he is only offering $50.
So there is a margin between the two of $50.
Now someone else comes along and wants to sell a widget, but he undercuts me by $1 and is selling his for $99.
A second buyer comes in and offers to buy at $51.
So you can quickly see over a period of time the selling price will come down and the buying price will go up until the two meet.
That is part of the dynamic.
Now with advanced electronics, high frequency trading, that process happens really fast between call and put options, brokerages bundling sales, etc… that it looks like when a bunch of stocks that sold the price went down, in reality the price went down and that is why they sold, we just only see it after the sale closes.
Now as the sellers prices start to decline, there is less pressure for buyers to raise their buying price. Remember we are just waiting for sellerbuyer prices to intersect.
So you end up with a list of buyer like:
A: 99.43
B:97.43
C: 94.22
D: 88.56
So a seller sells at 100… but no buyers, someone sells at $95 and suddenly A, B, and C’s orders are filled assuming they sold 3 shares. Now the next buyer is offering 94.22. The close of those sales reads $95 so that is what the new ‘value of the stock’ is. So the guy who originally tried to ‘broker’ a sale at 100 now has to lower his price to 94.22.
But someone really wants a widget so they put in a buy order for $96, the prices starts to go up.
This is where Support and Resistance comes from. That is what those old pit traders were yelling about all those years ago “300 of blah at $39.40” kind of crap. It’s all electronic now, thankfully.
Now in modern trading, we have market markers and a shit ton of tech, dark pools,etc… that makes it really fast and complicated, but the general principle in pricing is there. A bid down to market on the seller side and bid up to market on the buyer’s side.
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