Is there really such thing as more buyers than sellers and vice versa?
For a trade to happen there must be a buyer and a seller.
So how does the system even know how many buyers or sellers are there? Since the number of buyers and sellers (in terms of the number of shares) must be the same for trade to happen.
When a company has some bad news, the stock dives. But for the stock price to dive (in large volume) there must enough foolish buyers of the stock, otherwise the price wouldn't dive at all since there's no trade. Is there some part of the system I don't understand or are there simply that many foolish buyers out there?
If there are no buyers, you can't even short the stock right?
Answers
989 points
rvilmur answered 10 months ago …
The balance in buyers versus sellers is reflected in the bid and asked quotes and the quantity of the stock being bid for or the quantity for sale. When the balance shifts to the sellers the asked price will drop to attract buyers and when the balance shifts to the buyers the bid prices will rise. When there are large imbalances which can happen on openings and news events you can get large gaps in the prices which then temporarily re-balances the buyers and the sellers.
It really is an auction market where the price settles at the current balance of buyers and sellers. Nobody is being foolish. People and institutions just have opinions as to the future prices of what they are buying or selling.
Right now the uptick rule for shorting is suspended but your broker still must find stock to borrow for a short sale.
2222 points
readytoretire answered 10 months ago …
There will always be a buyer for every seller. The question is at what price. On big news days, there will be gaps where the stock jumps up or down. And as stated, there are many people, each with an opinion on where the stock is going. And when enough is enough. And many investors have pre-set sell/buy points, so when the news hits, they get executed, regardless of how far it is moving.
Note is some of the small markets, there are market makers that may buy the stock and hold it until they find a buyer. In these penny stock areas, there may not be a current buyer for every current seller, and vice versus.
You are correct, you can't short a stock if no-one is buying. It would have a price of zero.
348 points
Sensei answered 10 months ago …
To answer the initial question, yes, there is such a thing as more buyers than sellers (and vice versa.) In fact, this is a demand of the entire economic model, not just the stock market. If the number of buyers and sellers was always in balance, the price of the stock would never move. (Think, the Law of Supply and Demand.)
The "system" does not "know how many buyers or sellers there are." Nor does it have to. At any point in time there will be a number of "bids" on the floor and a number of "asks". Since the sellers want to maximize their profits, they'll always ask for more than they're being offered. The Law of Supply and Demand will determine whether the buyers have to "pay up" or the sellers have to "take down."
Your reference to "foolish buyers" is unfair because it fails to ask two vital questions ... Who is buying and why? and Who is selling and why? Although you've assumed a falling stock, let's consider the reverse. Let's consider for a moment a rapidly rising stock since the psychology is the same but in the opposite direction.
If you'd gotten Google on the IPO, you'd have paid about $85 a share. In a matter of minutes from the opening, it was over $100 and well above that in a few days. So, a few days after you've paid $85 for the stock, you have a chance to make a 50% profit. What do you do? Do you sell any? If you had, you'd have made that 50%, but a couple of years later, Google was over $700. Look a the money you threw away by selling too soon. So, were you foolish? Do you really think it was foolish to take a 50% profit in a few days? Really? I'll take a 50% profit a week all year long.
The point is that the seller may be motivated by something that has nothing to do with the mindset of the buyer. In this case, the buyer wasn't foolish. He thought there was still more money to be made - even if he had to pay 50% more for the stock than you did only a few days ago. (And in this case, he was right.)
But what happens if, as you've said, there is bad news? Assuming that we're not talking about a major financial fraud or something of that nature (i.e. that this is just a current economic mishap), is the buyer foolish?
As the prospective seller, your mindset is either that you're afraid to lose some of the profit you've already accumulated (on paper), or that you'll lose more than you already have (on paper). That's called "fear." But the buyer is thinking that this is only a temporary setback and that the stock will rebound over a time frame he is prepared to live with. He thinks he's getting a bargain. That's called "hope." The buyer isn't foolish, he's just looking at the situation from a different perspective.
On September 25, Research in Motion (RIMM) closed at $97.53. The next day it closed at $70.76 - down $26.77 - 27% - on "bad news." Ouch! The stock traded down to about $37 in December. The stock was tanking big time - down 62% from September and down almost 75% from it's high of over $142 in June. Today, it's about $56. Was the guy who bought at $37 foolish or the guy who sold it to him? And the guy who bought at $70 and is still down $14? He still has hope. Time will tell if he made a right decision even though at this moment he's still "under water".
And then, there are inveterate gamblers - the guy who'll double on 12 because the dealer's card is a 6. Again, they aren't foolish. Like the scorpion, it's in their nature. They'll take the big risk for the chance at a big gain.
