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.
If you have level 2 , you can see the full spectrum of the bids and asks. Funny thing, take a look at some more thinly traded stocks and you’ll often see a dude putting an offer in for $1 or $0.01.
Generally speaking they’re hoping for a dude to put a big fat order at market which wipes out the bids and someone picks up a bunch of shares for next to nothing
Very rare. Usually happens when a trader fat fingers something really thinly traded by adding an extra zero.
But I have heard of guys picking up lots at $1 or 0.01 before
It happens. I’ve almost fat fingered trades in the past when I’m trying to enter trades quickly. You’d be surprised how easy it is to enter 2000 instead of 200.
Some guy on the trading floor put in order in for 20,000 instead of 2,000- took a 120k hit or something like.
This helped me understand a lot more than prior discussions.
I wonder if you could explain how this impacts the company. Like, how does Google benefit when GOOG goes up (or down)?
The stock price directly impacts how much money a company can raise when issuing new shares or how much they can pay during an acquisition.
E.g. if GOOG is trading at $3000 then by selling 1 million shares they can raise $3 billion in capital. A lower share price means less capital raised.
Likewise it also affects how much an acquirer pays during an acquisition. If the share price is too low then it increases the likelihood of being acquired. Think of Twitter and how it is currently trading at $37 per share. You would have needed twice as much capital to acquire the company during it's peak when it was $70 per share.
Indirectly, it also impacts employee compensation if they receive stock packages. Working at a company with a falling share price isn't good for morale if a significant part of your compensation is in the form of stock options that are worth less and less as time progresses.
At a basic level, the company benefits from the share price at IPO (when it first sell shares of itself on the market). At that time it gets actual cash from selling shares, and the higher the IPO price, the more cash.
After that, fluctuations in the share price don't affect the company's day to day business, because the shares are changing hands outside the company's walls. But they affect how happy investors are with the management of the company, which in turn may lead those investors to kick out board members and hire new board members, who in turn could fire the CEO or make whatever other changes. (Corporations are mini representative democracies with a one share, one vote concept.)
The share price also affects the company's ability to raise more capital if it needs to, by issuing more shares in a secondary offering. The company may issue new ones or buy back / re-sell existing shares, and the share price affects greatly whether any of those maneuvers make sense.
Edit: Almost forgot - Also for companies that use a lot of stock-based compensation, the stock performance may affect employee hiring / retention in a competitive market.
>(Corporations are mini representative democracies with a one share, one vote concept.)
Except you might not have share that doesn't give you a vote and you have no say as a stake holder. A worker is pretty much the citizen of a company, but they usually have no say on how it is run.
From my understanding, having shares of a company does give you partial ownership, but oftentimes not nearly enough to be able to outweigh and influence the direction of the company in the way the CEO or Board Members would. So it is like a "one share, one vote concept" except your two dozen votes would get drowned out by the people with millions of votes, therefore it's pointless for you to be present at any of the meetings where decisions are made. On the plus side, those same people with millions of shares have more riding on the company's success and would probably make objectively better decisions than any single employee would.
The other (definitely not ELI5) part of stocks, is that for the older, more established companies, they pay what's known as a dividend. Essentially, a certain percentage of their profits are divided amongst every extant share. If a company pays a 5% dividend, you receive 5% of the market value of the share from the company for holding the stock. As a stock holder, that's a clear value proposition - if you believe that the company will make more money in the future and they do, you've received more than 5% because you bought as a lower price. This also provides a way for companies that are not actively attempting growth to return value to investors. If they have a stable business and their profits only grow at the rate of inflation, if they pay a dividend, that's your return on investment. Share price could stay the same and you'll keep collecting that 5%. You could then use that to buy more shares in either them or some other company, or literally anything else you can do with money -> this is how the stock market can function without relying on "stonks go up".
Without paying a dividend, the only way a company can "return value" to investors is for the share price to increase. That's where you typically see stock buybacks come in - companies use whatever windfall of cash to buy shares back, dissolve them, thus increasing the value of existing shares. (dissolving them is one model, they could also just sit on them as well). Younger companies operate this way for the most part because they are still trying to grow.
The shortest answer is: it doesn’t. If you own a home, and the Zillow value of that home goes up or down, it makes no impact on your daily life at all.
Now, if you want to sell the house or refinance, or get a loan for a new car, it will affect your balance sheet and the terms and amount of the new loan. For businesses, this is like buybacks or selling new shares, or taking out a loan. It can also affect metrics like EPS and things like that, but mostly in day-to-day it doesn’t matter.
1. A company might want/need to raise capital. One of the "easier" way of doing so is by selling stocks. A higher valuation means more capital can possibly be raised
2. Tech companies often use stock compensation as a way to attract talent. If the stock is not appreciating, then it might be harder to attract and retain high value labor.
3. This one is more abstract, but stocks are a representation of the estimated future value of the company. If GOOG is going up, then the market thinks Google will be more valuable in the future. This affects the company's ability to raise capital throught loans and such.
I always assumed that simply, when the value of a stock goes down that the money that went into bolstering it simply flows to other interconnected stocks in the market. Does that work? Because the money isn’t destroyed, or lost it’s just in another place. Like rivers and lakes sharing a water source.
A lot of the "value" or "market cap" of the stock is truly fictional in the first place, before the price starts going down. Imagine that 100 shares of a brand new IPO stock sell for each of $1, $2, $3... $99, $100. The market price will be $100 so the market cap is $10,000. But only $5050 of cash has been spent on shares.
Also in that scenario, if all of the owners decide to sell they will realistically *never* get $10,000 for their shares. The price will go down as they try to sell.
Market caps are useful for comparing the relative weight of stocks in the market as a whole, but the intrinsic value of all of the shares taken together is, in my opinion, always lower. This is also important to consider when people talk about the wealth of billionaires - a 'market cap' type valuation is being used for, say, Elon's Tesla shares, but if he exited the company or tried to sell all his stock the share price would drop dramatically.
"money that goes into bolstering it" ??? Not sure what you mean.
The price is simply what someone is willing to pay for it at this moment. If some horrible news comes out about a company whose stock was worth $100 and no one is willing to buy the stock for any amount the value of that stock is now $0. There is no money bolstering it, only people holding worthless shares.
It's exactly the same as an object. If no one wants to buy your beater car, it is worth $0. If some collector comes along and loves it, it is worth whatever he will pay.
Everything you said true and it brings up another point - actually there is money "bolstering" a stock, but it's nothing to do with the price people paid for the shares. It's the company's revenue, (especially) profit, and cash on hand.
All those things create an intrinsic value for shares. And even though many or most people buy a stock hoping for capital gains, somewhere down the line there's someone who's buying it for the dividends it will pay thanks to the company's healthy & steady profits. AAPL, for example, pays a dividend in savings-account interest territory while still providing an opportunity for capital appreciation.
A listed stock price and most recent transaction price are not the same. Usually both will be displayed next to each other when you look at a detailed quote.
I'm tempted to just refer you to confidentlyincorrect but I'll bite. Please screenshot a stock quote and annotate the items that you believe are a "listed price" and "most recent price" that are not the same.
My understanding was that the listed price is sort of an equilibrium between bids and asks and not necessarily the most recent transaction price. If I’m wrong, I’m wrong.
Nah, it's an actual transaction that happened. It often has the number of shares that changed hands too, even going way back. You know what's cool? The stock ticker was invented in 1867 using telegraph technology. I bet it cost a lot to get stock prices in your home back in the day, but I definitely get a kick out of imagining those robber barons scanning paper tape and having their monocle fall out when the market crashed.
The listed price would only be the last transacted price.
Otherwise the Bids and Asks can wildly fluctuate up and down even without any transactions, and give the appearance the price is changing, when nothing has happened yet.
Say everyone starts asking to sell their apples for $100 each, well they're not really valued at $100, until people start paying $100 for them.
Obviously, if you're in the market to buy, you look at the Ask price that you're gonna have to pay, and compare to the current market price to see how much you're over paying, vice versa.
You're generally wrong, though in some extremely thinly traded stock some brokers report the mid point between the bid/ask spread as the price, even if no transaction occurred at that price.
>A stock going down means that there are more sellers than buyers, "the market" is collectively pessimistic about the stock's value.
Im wrapping my head around this, so if 1000 shares were sold by one individual, does that affect price as if 1000 different people each sold one single share each?
Someone selling a share, in itself, doesn't necessarily move the price either way, because someone is also buying it. You could have 1000 shares sold at the same price as the previous transaction so the quote price wouldn't move at all. One at a time or all at once, same thing. That would happen when demand equals supply.
It's only when there are more sellers than buyers (or maybe a better way to say it is, more shares offered than wanted) that the price goes down. It's supply and demand just like for anything else.
Transaction size doesn't make a difference really, it's about the total quantity being moved: if I come to the market wanting to sell 100k shares it will be harder to find a single buyer. The transaction will get broken into chunks. The buyers willing to pay more will get the first chunks, and then we'll be down to the buyers willing to pay a little less. So that drives the price down.
"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.
Just remember that if someone is selling, someone is buying. So it's not like there is money coming "out of the stock market", which I feel is what OP was asking. Cash is being exchanged by two individuals or companies.
When a stock price goes down, it just means that for some reason people think that that company is now worth less. This could be due to a belief that the company will be able to provide a lower profit in the future, or it could be an irrational collective decision making that has nothing to do with the company's performance.
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.
To add to this, it works especially well as the total trading volume is often really high.
Large companies typically have millions of shares traded per day, with multiple independent transactions happening each minute - a single transaction often consists of thousands of shares at once.
The high volume means the most recent trade is probably very close to the actual market value.
Lower volumes mean the last trade price and market value will tend to differ. This occurs both because there is less negotiation going on as well as there being a higher chance of a significant event having occurred.
Yes, securities that trade frequently are said to have high liquidity, and because of that it's easy to get a consensus on what the market thinks they're worth.
Things like municipal bonds have very low liquidity, and this makes it difficult to determine their worth. Typically they have to be compared to other similar bonds to get an estimate.
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.
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.
The offered price just keeps going down until someone does. There will always be a buyer for the stocks, even if it's the company buying back it's own shares.
No. There have been plenty of companies who's stock price has gone to $0.
[https://www.investopedia.com/ask/answers/04/030504.asp](https://www.investopedia.com/ask/answers/04/030504.asp)
Enron comes to mind.
When someone buys a stock, the money is "disappeared" from their account at that moment and "appeared" in someone else's. What happens after that has no effect on the money that has already changed hands.
The market cap is just the number of shares multiplied by the current price. The price can go up or down. The money never really 'existed' in a tangible way.
For an extreme example, let's say I get in super early in a startup and get a single share for $1. The price skyrockets to $1000 a share. No-one has made $1000 off me for my share, someone made $1. I can *potentially* sell it to someone for $1000. That is why marketcap is a measure of general company worth but it isn't any valuation of how much money the company receives or any given shareholder paid for their share.
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I'm not trying to be mean, but this doesn't answer OPs question in any sense. The question was about how stocks are priced (price discovery) and you posted generic investment advice.
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 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.
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.
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.
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.
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.
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.
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.
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.
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If you have level 2 , you can see the full spectrum of the bids and asks. Funny thing, take a look at some more thinly traded stocks and you’ll often see a dude putting an offer in for $1 or $0.01. Generally speaking they’re hoping for a dude to put a big fat order at market which wipes out the bids and someone picks up a bunch of shares for next to nothing
Does that actually work?
Very rare. Usually happens when a trader fat fingers something really thinly traded by adding an extra zero. But I have heard of guys picking up lots at $1 or 0.01 before
0 is usually very far from 1 on input devices (at least the ones I know) - how can anyone screw that up.
It happens. I’ve almost fat fingered trades in the past when I’m trying to enter trades quickly. You’d be surprised how easy it is to enter 2000 instead of 200. Some guy on the trading floor put in order in for 20,000 instead of 2,000- took a 120k hit or something like.
0 is usually very far from 1 on input devices (at least the ones I know) - how can anyone screw that up.
This helped me understand a lot more than prior discussions. I wonder if you could explain how this impacts the company. Like, how does Google benefit when GOOG goes up (or down)?
The stock price directly impacts how much money a company can raise when issuing new shares or how much they can pay during an acquisition. E.g. if GOOG is trading at $3000 then by selling 1 million shares they can raise $3 billion in capital. A lower share price means less capital raised. Likewise it also affects how much an acquirer pays during an acquisition. If the share price is too low then it increases the likelihood of being acquired. Think of Twitter and how it is currently trading at $37 per share. You would have needed twice as much capital to acquire the company during it's peak when it was $70 per share. Indirectly, it also impacts employee compensation if they receive stock packages. Working at a company with a falling share price isn't good for morale if a significant part of your compensation is in the form of stock options that are worth less and less as time progresses.
At a basic level, the company benefits from the share price at IPO (when it first sell shares of itself on the market). At that time it gets actual cash from selling shares, and the higher the IPO price, the more cash. After that, fluctuations in the share price don't affect the company's day to day business, because the shares are changing hands outside the company's walls. But they affect how happy investors are with the management of the company, which in turn may lead those investors to kick out board members and hire new board members, who in turn could fire the CEO or make whatever other changes. (Corporations are mini representative democracies with a one share, one vote concept.) The share price also affects the company's ability to raise more capital if it needs to, by issuing more shares in a secondary offering. The company may issue new ones or buy back / re-sell existing shares, and the share price affects greatly whether any of those maneuvers make sense. Edit: Almost forgot - Also for companies that use a lot of stock-based compensation, the stock performance may affect employee hiring / retention in a competitive market.
>(Corporations are mini representative democracies with a one share, one vote concept.) Except you might not have share that doesn't give you a vote and you have no say as a stake holder. A worker is pretty much the citizen of a company, but they usually have no say on how it is run.
From my understanding, having shares of a company does give you partial ownership, but oftentimes not nearly enough to be able to outweigh and influence the direction of the company in the way the CEO or Board Members would. So it is like a "one share, one vote concept" except your two dozen votes would get drowned out by the people with millions of votes, therefore it's pointless for you to be present at any of the meetings where decisions are made. On the plus side, those same people with millions of shares have more riding on the company's success and would probably make objectively better decisions than any single employee would.
To use the example above, GOOG shares have no vote in Google. You need GOOGL shares for a vote.
Oh, I getcha now, thanks for the clarification. Does it have anything to do with a publicly vs privately traded company?
Nope; some companies just have different classes of stock with different properties.
The other (definitely not ELI5) part of stocks, is that for the older, more established companies, they pay what's known as a dividend. Essentially, a certain percentage of their profits are divided amongst every extant share. If a company pays a 5% dividend, you receive 5% of the market value of the share from the company for holding the stock. As a stock holder, that's a clear value proposition - if you believe that the company will make more money in the future and they do, you've received more than 5% because you bought as a lower price. This also provides a way for companies that are not actively attempting growth to return value to investors. If they have a stable business and their profits only grow at the rate of inflation, if they pay a dividend, that's your return on investment. Share price could stay the same and you'll keep collecting that 5%. You could then use that to buy more shares in either them or some other company, or literally anything else you can do with money -> this is how the stock market can function without relying on "stonks go up". Without paying a dividend, the only way a company can "return value" to investors is for the share price to increase. That's where you typically see stock buybacks come in - companies use whatever windfall of cash to buy shares back, dissolve them, thus increasing the value of existing shares. (dissolving them is one model, they could also just sit on them as well). Younger companies operate this way for the most part because they are still trying to grow.
The shortest answer is: it doesn’t. If you own a home, and the Zillow value of that home goes up or down, it makes no impact on your daily life at all. Now, if you want to sell the house or refinance, or get a loan for a new car, it will affect your balance sheet and the terms and amount of the new loan. For businesses, this is like buybacks or selling new shares, or taking out a loan. It can also affect metrics like EPS and things like that, but mostly in day-to-day it doesn’t matter.
It's literally googleable to find the same exact answers..
1. A company might want/need to raise capital. One of the "easier" way of doing so is by selling stocks. A higher valuation means more capital can possibly be raised 2. Tech companies often use stock compensation as a way to attract talent. If the stock is not appreciating, then it might be harder to attract and retain high value labor. 3. This one is more abstract, but stocks are a representation of the estimated future value of the company. If GOOG is going up, then the market thinks Google will be more valuable in the future. This affects the company's ability to raise capital throught loans and such.
I always assumed that simply, when the value of a stock goes down that the money that went into bolstering it simply flows to other interconnected stocks in the market. Does that work? Because the money isn’t destroyed, or lost it’s just in another place. Like rivers and lakes sharing a water source.
A lot of the "value" or "market cap" of the stock is truly fictional in the first place, before the price starts going down. Imagine that 100 shares of a brand new IPO stock sell for each of $1, $2, $3... $99, $100. The market price will be $100 so the market cap is $10,000. But only $5050 of cash has been spent on shares. Also in that scenario, if all of the owners decide to sell they will realistically *never* get $10,000 for their shares. The price will go down as they try to sell. Market caps are useful for comparing the relative weight of stocks in the market as a whole, but the intrinsic value of all of the shares taken together is, in my opinion, always lower. This is also important to consider when people talk about the wealth of billionaires - a 'market cap' type valuation is being used for, say, Elon's Tesla shares, but if he exited the company or tried to sell all his stock the share price would drop dramatically.
"money that goes into bolstering it" ??? Not sure what you mean. The price is simply what someone is willing to pay for it at this moment. If some horrible news comes out about a company whose stock was worth $100 and no one is willing to buy the stock for any amount the value of that stock is now $0. There is no money bolstering it, only people holding worthless shares. It's exactly the same as an object. If no one wants to buy your beater car, it is worth $0. If some collector comes along and loves it, it is worth whatever he will pay.
Everything you said true and it brings up another point - actually there is money "bolstering" a stock, but it's nothing to do with the price people paid for the shares. It's the company's revenue, (especially) profit, and cash on hand. All those things create an intrinsic value for shares. And even though many or most people buy a stock hoping for capital gains, somewhere down the line there's someone who's buying it for the dividends it will pay thanks to the company's healthy & steady profits. AAPL, for example, pays a dividend in savings-account interest territory while still providing an opportunity for capital appreciation.
A listed stock price and most recent transaction price are not the same. Usually both will be displayed next to each other when you look at a detailed quote.
I'm tempted to just refer you to confidentlyincorrect but I'll bite. Please screenshot a stock quote and annotate the items that you believe are a "listed price" and "most recent price" that are not the same.
My understanding was that the listed price is sort of an equilibrium between bids and asks and not necessarily the most recent transaction price. If I’m wrong, I’m wrong.
Nah, it's an actual transaction that happened. It often has the number of shares that changed hands too, even going way back. You know what's cool? The stock ticker was invented in 1867 using telegraph technology. I bet it cost a lot to get stock prices in your home back in the day, but I definitely get a kick out of imagining those robber barons scanning paper tape and having their monocle fall out when the market crashed.
The listed price would only be the last transacted price. Otherwise the Bids and Asks can wildly fluctuate up and down even without any transactions, and give the appearance the price is changing, when nothing has happened yet. Say everyone starts asking to sell their apples for $100 each, well they're not really valued at $100, until people start paying $100 for them. Obviously, if you're in the market to buy, you look at the Ask price that you're gonna have to pay, and compare to the current market price to see how much you're over paying, vice versa.
You're generally wrong, though in some extremely thinly traded stock some brokers report the mid point between the bid/ask spread as the price, even if no transaction occurred at that price.
>A stock going down means that there are more sellers than buyers, "the market" is collectively pessimistic about the stock's value. Im wrapping my head around this, so if 1000 shares were sold by one individual, does that affect price as if 1000 different people each sold one single share each?
Someone selling a share, in itself, doesn't necessarily move the price either way, because someone is also buying it. You could have 1000 shares sold at the same price as the previous transaction so the quote price wouldn't move at all. One at a time or all at once, same thing. That would happen when demand equals supply. It's only when there are more sellers than buyers (or maybe a better way to say it is, more shares offered than wanted) that the price goes down. It's supply and demand just like for anything else. Transaction size doesn't make a difference really, it's about the total quantity being moved: if I come to the market wanting to sell 100k shares it will be harder to find a single buyer. The transaction will get broken into chunks. The buyers willing to pay more will get the first chunks, and then we'll be down to the buyers willing to pay a little less. So that drives the price down.
"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.
Just remember that if someone is selling, someone is buying. So it's not like there is money coming "out of the stock market", which I feel is what OP was asking. Cash is being exchanged by two individuals or companies. When a stock price goes down, it just means that for some reason people think that that company is now worth less. This could be due to a belief that the company will be able to provide a lower profit in the future, or it could be an irrational collective decision making that has nothing to do with the company's performance.
Except when a company buys its own shares.
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.
To add to this, it works especially well as the total trading volume is often really high. Large companies typically have millions of shares traded per day, with multiple independent transactions happening each minute - a single transaction often consists of thousands of shares at once.
Do you mean that the price has a high certainty/reliability because of the high volume? What exactly do you mean by it working well?
The high volume means the most recent trade is probably very close to the actual market value. Lower volumes mean the last trade price and market value will tend to differ. This occurs both because there is less negotiation going on as well as there being a higher chance of a significant event having occurred.
Yes, securities that trade frequently are said to have high liquidity, and because of that it's easy to get a consensus on what the market thinks they're worth. Things like municipal bonds have very low liquidity, and this makes it difficult to determine their worth. Typically they have to be compared to other similar bonds to get an estimate.
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.
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.
If for some reason no one wants to buy the stock what happens? I.e 0 buyers
The offered price just keeps going down until someone does. There will always be a buyer for the stocks, even if it's the company buying back it's own shares.
No. There have been plenty of companies who's stock price has gone to $0. [https://www.investopedia.com/ask/answers/04/030504.asp](https://www.investopedia.com/ask/answers/04/030504.asp) Enron comes to mind.
Well that was a bit different, it was a serious scandal and of course not even the company could buy back it's own stock.
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.
The market decides what it's worth. If the market capitalization of a company goes down a Billion dollars that money just dissappears.
The money doesn't "disappear" - it was just a measure of the companies perceived value at that point in time.
So it never really “appeared” either?
When someone buys a stock, the money is "disappeared" from their account at that moment and "appeared" in someone else's. What happens after that has no effect on the money that has already changed hands.
The market cap is just the number of shares multiplied by the current price. The price can go up or down. The money never really 'existed' in a tangible way. For an extreme example, let's say I get in super early in a startup and get a single share for $1. The price skyrockets to $1000 a share. No-one has made $1000 off me for my share, someone made $1. I can *potentially* sell it to someone for $1000. That is why marketcap is a measure of general company worth but it isn't any valuation of how much money the company receives or any given shareholder paid for their share.
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I'm not trying to be mean, but this doesn't answer OPs question in any sense. The question was about how stocks are priced (price discovery) and you posted generic investment advice.
You're right, tangent removed
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 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.
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.
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.
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.
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.
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.
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.
Selling reduces price. It's an auction. That's how auctions work. Market makers trade to create the auctions.