I’ve always assumed that when people sell a given stock, then the price of that stock tends to drop, and if people want to buy a given stock, the price of that stock goes up. But there must be more to it, because if I sell a stock, then that means someone bought it, so wouldn’t the price stay the same? Or if people want to dump their shares of Company X, and there are no buyers, is Company X forced to buy its own shares back? But why would they have to? I know that earnings and perceptions of future earnings/losses influence investor sentiment, which in turn drives the market, but what makes the actual price of stocks go up and down if every share sold has a buyer?
Let’s say I own 1000 shares of XYZ, which last traded at $20/share and I want to sell. Well, if I find a buyer at $20, then great. If there are lots of people wanting to buy, then I might get more (supply and demand). If no one wants to buy at $20, I’ll have to lower my price. If 100 other people are selling XYZ as well, but no one is buying, the price is going to go into free-fall until someone decides to start buying.
A company is not required (to the best of my knowledge) to buy back it’s own stock.
Zev Steinhardt
Because as you say, both the buyer and seller are looking to the future. One thinks that the future price of the stock is iffy; the other thinks that it has potential. Both may be perfectly rational perspectives depending on their assumptions about the company, the market, and the economy. (This is ignoring selling short and other devices to make money out of falling prices.)
Or it may be that one side has more and better information than the other, either honestly or through inside information.
Either way, the price of a stock can be thought of as the present value of a future benefit. Depending on what that present value is considered to be, the stock price moves up or down (or stays the same).
The New York Stock Exchange works through a series of middlemen on the floor of the exchange, whose job it is to buy up stock when an outside buyer can’t be found. This is nornmally a short term situation until the price stabilizes. The company does not need to buy back its own stock. (It can do so, for other reasons, but is not compelled to.) Other exchanges work via a bid and asked system in which the price floats around a point until a buyer is found.
Thank you for the responses. So is the actual price of a stock set automatically by the average price at which it is currently being bought and sold?
Keep in mind that, when you read or hear the price of a stock, it’s actually the price at which a stock is trading on a particular exchange. You and I can agree to swap X shares of company Y for $Z, and that won’t get reported on the news. But most people trade stock via an exchange, where all trades in a particular company get routed through a specialist or a market maker who brings buyers and sellers together at a particular price which moves up or down in response to supply and demand. That price gets quoted as the “stock price” at that exchange, and at any given time there may be slight differences from one exchange to another.
May larger companies now have Employee Stock Ownershop Plans (ESOP’s) which buy stock on the market, and then transfer it into employee names each pay period as the employee accumulates enough to purchase a share. Since these plans need a supply of shares on hand each payday, they tend to purchase shares whenever they see a ‘bargain’; that is, when the price drops. This also helps keep the stock price up, because as soon as it drops the ESOP will start buying shares.
But none of this is required, of course.
Companies issue shares to employees via ESOPs and Employee Stock Option exercises (employees redeeming their options for stock). They do not necessarily need to purchase shares on the open market in order to support these programs. Many companies simply issue additional stock out of their Treasuries. But when they do this, they dilute the value of all of the stock that is in the hands of investors. If the total value of a company is $1 billion, and there are 1 million shares in the hands of investors, then the value of a single stock is $1,000. If the company now issues an additional 100,000 shares through ESOPs, then there are now 1.1 million shares outstanding. The value of a share now drops to $909. So the company can keep things as they are and piss off the investors, who gave up $91 each to the employees, OR buy back 100,000 shares and bring the value of each share back up to $1,000.
This is a simple example, because using cash to buy back stock automatically reduces the company’s value anyway.
The OP is asking a very simple question so let me try a very simple answer.
Every share of stock sold means a share of stock bought, true. But there are always shares of stock for sale that are not bought at the price asked. It’s just like the market for consumer goods.
There are also people who want to buy a stock but aren’t willing to pay the current price, hence no sale.
In a perfect market the price is determined by supply & demand. Lots of things affect supply & demand of stock shares, but mostly if people expect the price to go down it generates supply, and the opposite for demand.
When more people want to sell a stock at a given price than the number of people willing to pay that price, market pressure pushes the price down. When more people want to buy, it goes up.
The owners of those shares are stuck with them. Of course, there are always buyers if the price is low enough.
Remember that although you see stock quotes in the newspaper, there is no standard price. Each stock transaction is individually negotiated. There is no billboard that shows what must bepaid for a share of a particular stock at a particular time. If you look at real-time stock quotes on a finance web site you can see the very dynamic fluctuations in price from moment to moment.
Ok, this is a question that I’ve often wondered myself. And I’ve pretty much heard the standard answers already given. But this “supply and demand” answer doesn’t seem to really explain what I see in the real stock market.
For example, look at Apple (AAPL) on May 25 and 26 (2005). During the 25th, it bounced up and down between about 39.5 and 39.9, and closed at about 39.75. Then on the 26th, it opened at about 40.3. Why such a big jump from the previous day’s close? I don’t see anything in the news late on the 25th or early on the 26th that gives any big boost to investor sentiment about Apple.
And then there’s May 31. Apple hums along for most of the day at around 40.2 or 40.3, then in the last hour or so, with heavy volume, it plummets to around 39.7. Wha’happened? Again, I don’t see any news stories about Apple on Tuesday afternoon that might account for investors suddenly getting cold feet.
Or Earthlink (ELNK). It had been humming along quite nicely, rising slowly but steadily. On May 31, it closed at about 10.6. But then the next day it opened at around 9.7! That’s almost a ten percent drop from one day’s close to the next day’s open! And the only Earthlink-related news story I can see on the 31st is one about the bookkeeper of the co-founder being sentenced in a scheme that didn’t involve Earthlink at all. So what happened to drive the stock price down so hard between one day’s close and the next day’s open? Am I missing something?
The stocks you metioned are Nazdaq stocks. Nazdaq bid-ask are set by market makers for that particular issue. Market makers can set their bid-ask values where ever they please. Since MM (market makers) are so close to the stocks they trade, they can feel pressure to the buy or sell side and adjust their bid-ask accordingly. But the MM also play “bluff” with each other, and the trading public.
So the MM play their “poker game” with each other and the trading public, in the end, trying to make the most money they can during the trading day. Remember MM can also “short sell” their stocks, that is, sell stock that they don’t own, hoping to buy it back in the near future for a profit.
All the responses so far have been oversimplifying. My response will, too. It’s a complex mess 
Each stock has “market makers,” who have committed to floating at least a minimum number of shares. When you place a sell order, it won’t hang around waiting until somebody else places a buy order for exactly that many shares. One of the market makers will purchase your shares (or at least they’ll offer to, possibly at a lower price than you expected). Then they’ll sell shares to the next buyer that comes along.
The market makers live off of the difference between the buy and sell prices.
Again, that was vastly oversimplified, but it explains how you can make a sale even when there aren’t any obvious buyers floating about.
With Apple, for most of the day, people were willing to pay 40.2 or 40.3, and in the last hour they weren’t. You assume people change their willingness to buy or sell only on some fundamental news. That simply isn’t true. People buy and sell for all kinds of reasons. In fact, I’ll go out on a limb and say the vast majority of stock trading today has very little to do with news or fundamental valuations. People buy and sell for day trading, to raise funds, to avoid taxes, to hide money, because they like the name, because the price is anice round number than ends in zero, because they finally made it back to even, because the price is the same as the time of day, because the voodoo chart told them, because the palm reader said they were getting lucky, because they fall in love and need funds to buy a ring, etc, etc… Funds buy and sell to avoid taxes, to hide managerial incompetence, for complicated tax reasons, to match indexes, to keep their overall composition similar to some profile, etc etc.
Well, yeah, that’s what I meant when I said that supply and demand doesn’t explain what I see in the real market. But, on the other hand, there has to be some reason for sudden, relatively large stock price movements. Saying that people were willing to pay 40.2 and then they weren’t isn’t an answer. And for a stock to take the kind of drop that Apple did at the end of Tuesday, it must mean that a whole lot of people – or maybe a few people with a whole lot of shares – suddenly decided that it wasn’t worth 40.2.
So, again, the question is: what happened? Did hundreds of thousands of investors (and/or a few institutional investors), just by random coincidence, suddenly have all their varied reasons point to sell? Or was there one or two major events or discoveries or news items of which I’m just unaware that gave lots of people reason to dump their shares?
And let me add: I realize that if anyone could reliably predict movements like the Apple example, they’d be the richest person on Earth. But it seems to me that, after the fact, it ought to be possible to look back at an “event” like Apple at the end of the day Tuesday and with the advantage of 20/20 hindsight, figure out at least to some extent what caused it. Or is it really possible that it was just the random alignment of a whole bunch of people’s “sell meters” for a whole bunch of different reasons?
Ok, so you’re saying that, in the case of EarthLink, the market maker woke up today and said to himself, “I think I’ll chop ten percent off the price, just to see if anyone blinks.” Or that yesterday, he shorted a few hundred thousand shares and wanted to take his profit today? Maybe I’m just hopelessly naive, but I just can’t believe that there isn’t something more to it than that.
The event was simply that someone wanted to dump their Apple shares for whatever reason, couldn’t find a buyer at that price, and so had to settle for less. You’re looking for the reason someone wanted to dump their shares; it could be because their outlook on the company changed due to recent news, or it could simply be that he needed to raise cash to buy a Porsche (the way Apple shares have gone lately).
Ok, I think you’re still kind of missing the question. I fully understand that any particular person can have any of a million reasons for selling their stock shares. But, unless I’m way off in outer space, one person selling a hundred shares, or a thousand shares, or even ten thousand shares of a stock like Apple is not going to have much of an effect on the price. According to Yahoo, over sixteen million shares of Apple changed hands today. One person selling even ten thousand shares just can’t have much of an effect on the price.
And, indeed, it’s pretty clear looking at Tuesday’s chart that it was not the case that one person or entity dumped a boatload of shares all at once. The price went down quickly, but it didn’t fall from 40.3 to 39.7 in one fell swoop, it went down in steps, over the course of an hour or so, and there was a noticable increase in volume during that time (compared to the prior part of the day).
So it seems clear that, rather than one person, a whole lot of people – thousands, I would assume – decided to unload a whole lot of Apple shares in a pretty short span of time.
Now, I do understand that, to some extent, a drop like that can be self-perpetuating. In other words, once the price drops appreciably, other holders of the stock decide they had better unload their shares before it drops any further which, of course, then causes it to drop further, etc.
But on the other hand, looking at the Apple chart, there are plenty of occassion where the price started down for a tenth of a point or two, then came back up.
So something had to be different about the end of the day. A couple of times prior, the price dipped down and came back up, but then at the end of the day, it dropped and kept dropping. Something had to be different.
My feeble mind can think of two possible explanations: 1) That among the thousands of people who held Apple shares, it just happened by random coincidence that a large number of them decided to sell within a short period of time; or 2) Some event or news item or piece of knowledge came to light, came to the attention of a large number of Apple shareholders and was viewed by most to be a bit negative and so they started to unload their shares. And this bit of information wasn’t significant enough, or it was outside of normal channels, or something, so it isn’t appearing under the news items related to Apple.
So my GQ is: Is the reason Apple dipped #1, or #2, or something else that I didn’t think of?
I would say #2 is more likely. How did IBM, HWPQ, MSFT and ORCL do in the same time-span? There are “sector” selloffs.
AAPL trades 10M+ shares a day. There are big players out there that “scalp” stocks like AAPL, that is, stocks that trade large numbers of shares but generally don’t move a big percentage on any given day. What a typical scalper will do is borrow money to buy the stock, then “flip” his shares many times during the day. They trade on every “tick”, that is, they watch EVERY trade made throughout the day. They have mathematical “systems” they use whether to buy or sell, but typically at the end of the day they sell any excess shares they have accumulated during the day.
I’m not saying this is what happened to AAPL on that particular day you are talking about, but I just wanted to point out one more of the millions of reasons why a stock moves like it does.
It’s more than likely #1. However, it’s not like thousands of 401(k) holders suddenly decided to drop their stock, but more likely some institutional traders who are working on tremendous volume.