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?
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The market decides what it’s worth. If the market capitalization of a company goes down a Billion dollars that money just dissappears.
Both. Stock prices are reports on the most recent sale of actual shares, so at least two somebodies have decided that the lower price is where they are willing to buy and sell the stock. But that new valuation also affects all the shares that are held but haven’t been traded, as unrealized loses.
Both. When you say “the market just decides”, “the market” is “many people” and “just deciding” is based on what they are selling/buying for.
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It’s closer to the latter of the two, but it’s both.
The key thing to understand is that when you see a stock quote or stock price, that is *the price at which shares changed hands most recently.* In other words, a few seconds ago someone sold a few shares to someone else at that price.
Importantly, a stock quote is *not an offer to buy or sell at that price.* So if you see a stock quote and you go sell your shares at “market price”, you will get slightly higher or lower than the quote based on various factors. (The “bid” and “ask” prices in the quote are the current offers to buy and sell, respectively.)
A stock going down means that there are more sellers than buyers, “the market” is collectively pessimistic about the stock’s value, and so the sellers are dropping their “ask” prices to get the few buyers to bite. Each successive trade is for a slightly lower price than the one before. This continues until the price hits a level where potential buyers start getting more excited and jumping in.
“The market” is the result of peoples’ decisions. It does not exist as an independent entity.
So: “many people selling” and “the market decides the stock is worth less” are just two different ways to say the same thing.
Stock price is just the latest reported trade.
Hypothetically the total value of the company is *total shares * latest price* (i.e. market cap).
Buying and selling causes the price to move so you can’t just sell 100% of a company and expect everyone to pay the current price unless there is high liquidity (including possibly a backdoor deal with a large buyer that also doesn’t want to move the price *up* while buying).
E.g. Last year a person made up a cryptocurrency called “Squid game”. The price went up until the market cap was in the trillions of dollars. Somebody then sold their stake for ~$3 million, bringing the market cap to zero. That would be an example of low liquidity.
The key to understanding this is that everybody’s got their own price. One stockholder might be willing to sell at $5, another one at $4, and a third at $3. Same for buying: various people hoping to buy the stock might offer $1, $2, and $3 for it. In this scenario, the $3 bid would “clear”, since buyers and sellers can agree on a price. The new lowest price to buy is $4 — that’s the “ask price” of the stock.
Now suppose somebody with high hopes and deep pockets comes along and offers $4. The $4 seller’s offer clears, and now the new lowest price is $5. The price of the stock has gone up.
In its simplest form, it comes down to supply and demand.
In a liquid market if there are more demand from buyers than sellers, then the price needs to go up to meet the demand. Same holds true if there is more demand from sellers than buyers.
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.
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