Who ACTUALLY sets stock prices? (I get supply and demand) and how did this work before computers?


I get that supply and demand sets the price but WHO actually dictates the price?

Like do a special group of brokers negotiate a price, make a transaction and then that is the price on the market? Is it an algorithm and if so How did this work before computers

In: Economics

I’ve seen currency exchange (like dollars to yen) and it works by two brokers talking over instant messenger. It’s a weirdly personal interaction.

Large stock transactions seem to work the same way, but I don’t know how it works when I sell my two shares of Walmart.

In the past that is what a seat on the stock exchange was. The right to have a person on the floor to trade. These people went back and forth on looking to buy or sell stock. There were specialist the orders for a particular stock went through.
If you want to see it in action look for the futures pits in Chicago on Google. There was a lot of shouting and hand signals.

The number quoted as “the price of stock A” is the price of the last public transaction.
If I sell my stocks in A for $10.00 and someone is willing to buy for this amount, the price of stock A is $10.00.

Supply and demand do not influence the price directly, but instead change the willingness and amount of buyers and sellers. On good news payers are willing more to pay more and seller think their stock is worth more. So the next transactions will cause the stock price to rise.

And to be complete: The above is only true for liquid stocks. If only few people want to buy and sell, there are too few transaction to determine the price. In that case there are special market makers. These are people willing to buy and sell for a price they themselves set. As a non-market maker, you can either accept the price or walk away.

Playing EVE Online is a really good intro into how markets work. When you buy a stock, you’re actually putting up a “buy order” that other traders can sell to. Similarly, there’s a “sell order” that other traders can buy from. When you create either order, you can set a price. If you set the price of a buy order too low or if you set the sell order too high, you won’t get any offers.

Any time there is a sale in either direction, the amount sold and the price it was sold for is recorded by the “market”. In the real world, the market is the exchange being traded on (i.e., New York Stock Exchange). The price you see quoted is usually the average of the trade prices for that particular stock over a given time period.

You might then wonder, “who sets the price to begin with?” Well, the answer is nobody, really. It’s one of the reasons you see IPOs for companies with huge opening prices. No one really “knows” the price of a stock, they’re just guessing and at the very beginning they don’t have much else to go on besides hype and press releases.

As time goes on, people see how the company actually performs and traders adjust their assessments of what that stock *should* be worth. In a lot of cases, the price goes down simply because when it comes time to sell stock after an IPO no one wants to buy it for the high price it initially sold for.

The price eventually settles into a place where traders will buy and sell readily. This is a mostly organic process; no one is dictating prices, sellers are just lowering/raising their offers until they get a buyer that will make them the most money.

EDIT: I should point out that this is how markets are *supposed* to work. There are all manner of things people can do to influence prices because the “market” can’t control for greed. For example, if you own a large percentage of the available shares you can effectively drive the price up by simply not selling. This reduces the the number of possible sell orders for interested buyers and if there are more buyers than sellers, the buy order price will go up as the buyers compete with each other.

Buyers and sellers of the stock. Buyers submit orders at the price they’re willing to pay, sellers submit asking prices they’re willing to accept. When they agree, the trade gets executed… this matching buy and sell orders are what the stock exchanges do. As buyers and sellers get matched, the prices keeps shifting to match buy and sell demand. The guy who won’t sell at $40 decides to sell at $40.25. A buyer who wants in sees the movement up and puts in an offer for $40.50 and another seller is willing to sell.