Dumb stock market question - everyone's selling, who's buying?

I’m not too savvy on the details, but I get the general gist of the way the stock market works. What I don’t understand is recent new articles saying stuff like “Investors around the world have been selling off stocks as they come to realize that financial systems in the United States and other countries need more than government bailouts to fix them.” (AP)

As far as I understand it, you can’t just sell stock into the ether. Each stock transaction includes a buyer and a seller, no? How can there possibly be more buying than selling going on or vice versa? :confused:

I know next to nothing about the stock market myself, but as I’ve always understood it: the sellers are selling their stock back to the company which issued it.

There can’t be. If you want to sell your shares, you need to find someone willing to buy them. The fewer people willing to buy, the cheaper you have to sell them for. It’s simple supply and demand. The more you want to get rid of, the less money you’re willing to take to part with it.

No. Companies do occasionally engage in share buy-backs, but that’s not what’s going on during market trading.

Oh.

But isn’t a “stock buy-back” a special kind of move that companies only do occasionally?

I think what it means to say that “everyone is selling” is that more people are trying to sell than trying to buy. Following supply and demand, this drives the price down until the numbers equalize.

If cattle were being traded at a market, and the sellers were trying to unload 500 cattle at price P, but the buyers were only interested in 100 cattle at that price, the sellers would keep cutting the price until it became low enough that the buyers were willing to buy 500 cattle. I think that’s how the stock market works too, but on a mechanical level I don’t actually know.

Edited to add: friedo, am I correct to suppose that when a company buys back shares, those shares basically evaporate and the total number of shares in the company decreases?

This is why stock prices can be so volitile. A small change in the number of people who want to buy or the number who want to sell can cause a big change in the stock price. If the number of sellers increases a small amount while the number of buyers also decreases a small amount that can lead to a very large fall in the stock price until the sellers find someone willing to buy their stock at the lower price. And vice versa.

Believe it or not, when a stock becomes cheap enough there are people willing to buy it. I am currently continuing to buy stocks on the way down because I’m betting they will eventually bounce back to their previous levels. Only time will tell…

The buyers expect the stock to go up. They view the drop as temporary and that it will rebound over time. If you have a very long term view, you may be picking up some bargains.

Or, they can be dead wrong. But they figure the rewards are worth the risk.

What this also means is that even when the stocks are plummeting, at any given time someone is actually buying at the quoted price. If demand for stocks were insufficient to cover all the stocks being offered for sale at any price, I suppose demand would have to be zero, since if you’re willing to buy only so many shares at a given price, you should also be willing to buy twice that many shares at half the price, right? In other words, it’s hard to imagine a situation where S shares can be sold at price P, but no more than S shares can be sold at any price.

Unless it gets into a position where it owes more than it owns (i.e., in accountants’ terms, its liabilities exceed its assets), every company is worth something. So, unless a company is bankrupt, eventually you’ll find a buyer for its shares.

But most companies are worth more as going concerns, so you’ll find buyers at prices above that rock-bottom price, which is based on winding up the company and distributing the excess of assets over liabilities to the shareholders.

It depends. The company can either disappear the shares, making the rest of the outstanding shares a smidge more valuable, or hold onto them for eventual resale when they want to raise more capital.

As others have said, shares that are sold on stock exchanges are purchased by buyers. The bit about “selling off stocks” is just shorthand to indicate supply is outstripping demand and driving down the price.

Re: share buybacks. In some cases the shares can be destroyed. More often, the shares are simply returned to the company’s treasury.

Stock exchanges are big auction markets. Buyers state stock prices and volumes at which they are willing to purchase shares. Sellers state stock prices and volumes at which they are willing to sell shares. Exchange intermediaries (specialists, market makers, etc…) coordinate all the offers to match buyers and sellers.

As I was listening to the news today (my 401K is worth less than it was Friday) commentators were saying that trading volumes were relatively light. I’m guessing that if shares are offered at X dollars and no one wants to pay X, not only does the price drop, but there are also sellers who pull their shares off the market until the price comes back up to X.

I think no one has mentioned the role of “specialists”. See http://www.sec.gov/answers/specialist.htm for more information. Basically specialists (who, IIRC specialize in a small number of stocks) are required to buy in falling markets and sell in rising markets. In general, this means that they buy low and sell high and that is where they profit. When I learned about them, they were required to make 3/4 of their purchanes at a price lower than the previous sale and 3/4 of their sales when at a price higher than the previous one. So they guarantee (or are supposed to guarantee) that there are always buyers and always sellers.

Yup; not all trade requests can necessarily get fulfilled. If the seller really needs to sell, he may lower his asking price. If he can wait, he may indeed pull his shares off the auction block. Or he may just leave his offer open until a bidder comes along and bids a sufficiently high price.

I’m a stockbroker.

There are two types of markets: Exchanges and over the counter markes

I’ll try to simplify as much as possible. On an exchange, the floor specialist is the one who is required to buy and sell out of his/her inventory of a stock to maintain an orderly market.

In over the counter markets, there are one or more firms who serve as market makers. These are broker-dealers who maintain an inventory of a stock and buy and sell out of that inventory.

I’ve read so many books on value investing over the past few years that I forget where this comes from, but they were making the point that when stocks are going up, the media always says “everyone’s buying”, when they’re going down, the story is “everyone’s selling”. As has been made clear above, logically, there are an equal and opposite number of stocks sold/bought, so this makes no sense. Just one of the memes of stock market reporting.

(There can be different numbers of buyers and sellers, though, because one guy can buy, say, 1 share from each of 100 sellers - so there is one buyer but 100 sellers.)