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?

Question

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

Answer 1

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.