Stocks – what *precisely* changes the value of a stock?


I guess I understand supply and demand – I have something I judge more valuable, I’ll ask for a higher price to sell it for.


I wonder how company stock is valued – Is it enough to have one single person ask for a certain price for a stock to change its value?

I guess I’d like to understand it in terms of a company that only has 10 shares. If I’m the owner of one, how impactful am I in changing its price?

In: Economics

*Asking* for a certain price doesn’t change the value. The quoted value of a publicly traded stock is just the price of the last *agreed* transaction (both buyer and seller agreed on the price).

The number of shares isn’t directly relevant. If you can sell at $1000/share then that’s the price of the share, whether there’s 10 or 10 billion shares. However, volume/liquidity (how many shares are available to buy & sell) has a lot to do with how easy it is to actually get an agreement on the price. If millions of shares are changing hands every day, any individual transaction is pretty insignificant. If you’ve only got 10 shares then a sale represents 10% of the company and, unless it’s a *tiny* company, even very small changes in the company valuation could result in huge changes to the share price and with only 10 potential shares floating around there could be large changes in price between subsequent transactions.

A share of stock is only worth what someone will pay for it. That usually relates to the actual value of the company itself, but not always.

So, if you have stock in a company that people want to buy and believe the price will increase in, the price likely will increase because people are buying at the higher price in order to make money for that potential increase. Once it rises enough, people start to think that that’s as much as it will increase and they start to sell the stock that they had. Once enough people start selling, the stock levels out or starts to dip. Then, even more people see that it’s starting to dip and start selling their shares thinking that it’s going to be the new trend. There are other people who just sold at the peak and they see this dip as a temporary thing and they start buying in again believing that it’s going to go back up. The cycle continues with people buying and selling, some making money and others losing.

If you are holding all 10 shares or even just one of those 10 that exist of a stock in a company with no one buying or selling, there is no value to the shares until you sell. Once you sell, whatever price you sell it is the value of the stock. If you or the other person sells more stock for a different price, that is the new value.

The “price” of a stock is how much the stock was sold for the last time it was traded. So, if someone recently sold a piece of the stock to someone else for $100, the stock price is $100. If you own the stock and say “I will sell this stock for $200”, it probably won’t change the price, because nobody is going to want to buy it for that much.

There are usually lots of people who have placed orders at certain price thresholds. Maybe for that $100 stock, there are people who’ve placed orders saying “I want to buy the stock, but I won’t pay more than $99 for it” and other people saying “I want to sell the stock, but I won’t sell it for less than $101”. So now, if you jump in and say “I’ll sell the stock, at whatever is the best price I can get”, then it would get sold to one of the people offering to buy it at $99. Thus, the price would now be $99.

Imagine you own one share, Brianne owns 4 shares, and Claudio owns the remaining 5.

Brianne has offered her shares for sale on an exchange, and her order is: Sell for $5 per share. Claudio has offered his for $6. So if Dee comes along wanting to buy 3 shares, she will search for the lowest selling offer currently open, and that’ll be Brianne, and Dee will buy 3 shares for $5 each. Brianne has 1 left, and the price is still $5 (unless Dee’s interest has convinced Brianne that she should change her asking price.)

But suppose you have offered your single share for sale for 4 dollars. At that moment, the cheapest share available for sale is 4 dollars. Then when Dee comes along and searches for the lowest offer, she’ll see yours. But she wants 3 shares and you only have 1, so she buys your share and 2 of Brianne’s, and now the lowest available price is $5 again. The trading price won’t rise to $6 until all Brianne’s shares are gone.

So, if you like, with a single share, you can single-handedly force the price of a $100 stock down to $1, *sort of*. But the price will only be that low for as long as it takes to sell all your holdings. Which will probably happen in the blink of an eye. If you wanted to bring the price down to $1 and hold it there indefinitely, you would have to own so many stocks that you ran out of interested buyers before you ran out of stocks. And the law of demand is that the lower the price, the more interested buyers you’ll find.

A stock quote is literally the last purchase that was executed, meaning a buyer and seller agreed to a price. If I put in an order to sell 1 share, that’s a quote. If a mutual fund puts in an order to buy 1 million shares, that’s a quote.