When a stock price goes down, is it that many people have sold and now have that value in cash OR is it that the market just decides the stock price is now worth less collectively?
In: 103
Selling reduces price. It’s an auction. That’s how auctions work. Market makers trade to create the auctions.
The stock price is the last price that shares of stock were sold, representing the value that investors place on the stock.
You are in a room of investors. Everyone is holding different shells. You want the best shells, and so does everyone else, but “best” is opinion. People willing to give us certain shells put them on the table with a price. If people want those shells, they buy them. If not, they stay on the table. The seller lowers the price until someone buys that shell. THAT is the stock price.
If more people value certain shells, and they get snapped up immediately, the next shell of that type put on the table is going to get priced higher. You’re welcome to double the price if you want. It doesn’t matter if no one buys it. Most people are setting their sale price at the highest that they reasonably thing people will pay (if they really want to sell), or at an aspirational price that’s around the top that they think people will pay. They get their money back, plus capital gains (profit), and invest that elsewhere.
Again, the stock price is the value of each share at the last transaction.
On a Macro scale, a stock price goes down because people will sell for less than it’s listed for. They will do that because they have lost confidence in either the specific stock, or the market as a whole.
If you have a stock worth $100, but no one will buy it from you at $100, and you believe next week it will only be worth $80, then you’ll probably sell it for somewhere less than $100 but more than $80. So if you sell it for $95. Now the stock is trading at $95. You save $15 you otherwise would have lost, and now the stock price is $5 less.
One person doesn’t really make a difference especially when most companies stocks see hundreds of thousands of transactions a day, but when you aggregate all those transactions you can see those trends of people buying over current price (causing the price to go up) or selling at lower than current price (causing the price to go down).
The trick to making money is knowing what a stock will do. Not hard if you really study a company (but of course that’s only one stock), but you can always get dicked over by a market correction or, like now, a recession.
A stock’s “price” is basically the lowest price that people are willing to sell it for. Imagine a stock is selling for $50, many people want it, and someone tries selling it for $40. It sells immediately, and the lowest price remains $50. Now imagine no one wants it, you go to sell it for $45, and still no one buys it. This causes the price to go down to $45. Generally speaking, a stock price going down means more people want to sell it than want to buy it.
It’s a change in the balance. A stock price is set at a balance of it being sold and bought. Say a stock is at 75 dollars. At this specific moment 1000 people are buying and selling it at that price. Now the next day there is a moment where 1000 people are selling buying 1500 are buying. Not due to this imbalance the price goes up to $90. It goes up and stops when some sellers saw the price rise, now 1200 are selling. As well as buyers decided to walk way and only 1200 remain. On day three people want to cash out on this new price. 3000 are selling but only 1000 are buying. The price falls again until their is an equilibrium.
Now this is very over simplified but that is the point of eli5.
Lets go even eli5-er.
You own a share of Widgets R Us (WRU). You bought it for $100. The current value is 100. A guy offers to buy it for 150. The value is now 150. Note you don’t sell it, you don’t make any money. It’s a theoretical value, only realized if you sell. A few weeks later it comes out WRU is coming out with a product, pineapple pizza. Everybody knows this is a bad idea and you wan’t to get out. You call that guy who offered you 150 and he says he isn’t interested anymore. You offer it for sale at 150, 140, 130…100. You cant even break even. Some lady offers you $70 for it. You consider it. The current value is now $70. Note that no money went anywhere. You decide to hold. You think it will eventually go up. A couple weeks later you get scared and ask the lady if she still wants to buy it. Shes says yes but now only offers you $40. It’s current value is 40. You again decide to hold. You decide to weather this storm. These things always happen in the stock market and it can recover, even if it takes years. A few days later you find that the report of the new product was just some weird employee ordered pineapple pizza for lunch and the media just got the facts wrong and blew it all out of proportion. The company is actually doing better than they projected people start to call you. First the lady who now is offering $100, then the first guy offering 150, no 160. A third guy calls offering $200. The value is now 200.
You could sell here and make 200. Notice that no money goes anywhere until a sale happens. Here you decide not to sell. You know this stock is a long term investment. You see it’s value going much higher in the future. You are thankful you didn’t sell during that panic phase and took it as a life lesson. As long as you are well diversified you are in a good position. Dips will happen. The trick is not to get scared and bail out, locking in your losses. The marked will recover.
There are a bunch of people with sale orders and a bunch of people with buy orders.
A buyer’s price is essentially the most they’re willing to pay, and a seller’s price is the lowest they’re willing to receive, so whenever the highest buy order price goes above the lowest sell order price a transaction is made. The market price is just a history of past transactions.
To make it super ELI5, this may be the easiest way to explain it:
When stocks go down in price, it’s because people were willing to sell them at lower and lower prices. Hence the price represents what the stock last sold for.
The buyers would only buy that stock if the prices were low enough to attract their interest. In effect, the market decides the price because the buyers and sellers *are* the market.
Most of the trades aren’t direct anymore anyway unless you’re on your own on an independent online broker. If you’re going through a banks platform, they buy and sell large chunks, sometimes at a discount because of the volume, and you’re buying from them rather than say me, when you want 2 shares and I’m selling 2 shares. Unfortunately because of the high volume bank trades, it does affect prices but not by a lot unless you’re looking for volume yourself. They will also look to sell to you at highest available price rather than current market in most cases. If you buy from me, it could be 99 bucks, cheapest is 97 most expensive is 102, and you order through chase, they sell you from their shares at the 102 because it’s available at that price if you want to check.
It’s sorta hard to say. You’re taught that the price is found by the demand meeting supply: high demand and low supply makes the price go up, low demand and high supply makes the price go down.
But when guys like Doug Cifu, [Virtu Capital](https://en.wikipedia.org/wiki/Virtu_Financial) CEO says [they can supply “infinite liquidity” (it’s just after the 3 minute mark)](https://www.cnbc.com/video/2022/06/08/virtu-financial-ceo-weighs-in-on-payment-for-order-flow-regulation.html), it sounds like the firms that are actually executing the orders can just make infinite supply. As he describes it: if an order for 1000 shares comes in, and there are only 200 shares available to sell, they’ll still sell the 1000 shares. “That’s meaningful liquidity.”
I’m not a financial guy, but that sounds like a scam.
The latter, mostly. It depends, if a stock is speculative (Tesla) then what can happen is people start realizing that market conditions aren’t what they thought they once were and people start selling their shares. When people start selling the price tends to go down. People aren’t willing to bid up the price anymore. When you bid up a stock you are betting it will be worth whatever you are betting *sometime in the future* and that is super risky. Tesla is more valuable than Toyota? Maybe…maybe…maybe, maybe **not**. That is the risk.
Stocks also tend to go down right after a dividend is paid, even if it is a dividend aristocrat. It is driven up right before the ex date as people buy at the last moment to qualify for the dividend. In that case it is still the essential supply and demand (more people selling, price goes down) but it is not a reflection of the quality of the company.
Latest Answers