Stock Experts (Question)

[kerrywins]

You know how everyone freaks out when they say..."everyone's selling their stocks for so and so company....so the price is dropping"...
well...if they sell them...doesn't someone have to buy it?
i mean, just as many stocks selling, have to be bought....
can someone explain why this is bad?

[BlueEyedSon]

1. There are always buyers, just at a LOWER price.

That is bad for a stock....

[kerrywins]

2. so, who determines the price to sell the stock?

each stockholder?
then what the heck are stock prices used for?

[Worst Username Ever]

4. The buyer determines the price

See my post below. It is just like any other thing that you buy. Supply and demand. High demand for a stock, the price goes up because people are willing to pay more. Low demand, the price falls, no one wants it unless they think it is a bargain.

[kerrywins]

5. then...

what the heck is the stock price for?
whats the point in nasdaq listing the stock price?

[Worst Username Ever]

6. That is what people are currently willing to pay for it.

Essentially the highest bid for that stock. The price you see on the ticker is the price paid on the last transaction.

[kerrywins]

8. but if..

people sell it for whatever they want...then it seems like you'd be seeing the price jumping all over the place....that is not the case...so something isn't adding up...

[Nederland]

11. Response

People can't sell it for whatever they want, they can only sell for what someone else is willing to pay. If a seller of a share of stock wants $40 bucks for it, but nobody is willing to pay more than $30, there will be no transaction.

[kerrywins]

15. yeah, but

it doesn't make a difference who sets the price....if you're telling me its changing to meet different people's demands....you'd think the stock price would be jumping all over the place....but it doesn't...again...this doesn't add up.

[LunaC]

18. During the trade day a stock CAN be all over the place.

Most people are familiar with a stock's closing price (the price of the last trade for the day) but if you watched that stock throughout the day, you can sometimes see big fluctuations in price.

If you look at a stock's chart you'll see a price for "High" and "Low" prices for the day, indicating the most and least amount people paid per share.

Here's a sample chart that shows a trading spread (the difference between the High and Low) of $.23 for the day.
http://stockcharts.com/def/servlet/SC.web?c=siri,uudalaniay&pref=G

HTH!

[Nederland]

19. It does jump all over the place (nt)

[Worst Username Ever]

12. People will only sell it for the most they can get for it.

Let's go back to Lincoln logs (I just bought a crap load of them for my nephew, that is why it popped into my head). If I have 100 pounds of the things, they are probably worth something to someone else, if I wanted to sell them. But if there are 1000 other people who also want to sell, I am going to gradually lower my price until someone out there chooses my price. I won't suddenly cut the price in half, just like if there was a HUGE demand for them, I likely wouldn't immediately double my price. I am going to gradually raise or lower my price until someone offers me the best price I can find.

Sometimes, however, there IS a huge spike in supply and demand, which is why you may see a stock suddenly double or triple, or drop down to almost nothing. It is all the whim of the market.

[Worst Username Ever]

3. It is like anything else you sell

If I bought 100 pounds of Lincoln logs for 40 bucks a pound, because Lincoln logs were in really big demand, and hence, valuable, but suddenly NO ONE wanted to buy Lincoln logs, just sell them, I am going to end up selling at a lower price then I bought. SOMEONE out there will buy my Lincoln logs for, say, 5 bucks a pound, in which case I have lost my shorts in the Lincoln log market.

[yardwork]

7. But if you can afford to hang onto your Lincoln logs until the price rises

then you will do ok, right? You won't have any money to invest in other things while your money is tied up in the Lincoln logs, though.

Isn't that the general idea behind 401(k) and other long-term investments? That the market will rise and fall but if you are in it for the long term and you have diversified holdings in lots of companies, you'll be ok?

[Worst Username Ever]

9. Exactly

401ks and other retirement vehicles generally are made up of mutual funds, which are usually a mixture of stocks and bonds. The underlying stocks will fluctuate, but you assume that over time these companies will grow and become more successful, and hence more people will want to buy the stock. Which of course means that over a long period of time, the value of the stock (what you can sell it for) will go up.

You are right, as long as your money is tied up in Lincoln logs you will have to make a decision about the future of Lincoln logs. Will demand go up or down? That governs why people would then buy or sell their Lincoln logs.

Mutual funds usually take out the guess work, you have analysts deciding FOR you is they are worth holding on to. You just put your money in there and they invest it in what they believe will make the most money.

[BlueEyedSon]

13. Some stocks go to zero.

Others never ever get back to their highs (which may be where you bought them.....),

[Irishladdie]

10. Simple, Supply and Demand

[Yupster]

14. Think of a picture of the stock exchange

there's a guy in a circle, and lots of people around him shouting.

That person in the circle is the "market maker."

Let's say he's the Coca Cola Market Maker.

He buys and sells all KO stock in the NYSE. He keep anout 1/4 of a cent per share he trades.

So let's say KO is selling for $ 45 per share and they announce (like today) that their profits will come in way less than they expected.

Someone runs up to him and wants to sell him 10,000 shares of KO. He asks what the other people around him will buy it for. $ 44.50 shouts one guy, I'll take 5000 shares. So the guy buys the 5000 shares for 44.50 and sells it to the other guy.

Now the price for KO has fallen to 44.50, but the market maker still has a guy who wants to sell 5,000 more shares.

Who'll buy these 5000 shares for 44.50 he says? No one. What about 44.25? Some guy says I'll take them, and the deal is done and the price has just fallen to 44.25.

That's how it actually works and how a stock price can fall $ 2 per share in one day like KO did today.

Simplified, but that's the idea.

[kerrywins]

16. wow...thank you

thats BY FAR the BEST explanation in this thread...
thank you....you rock!!!

[Yupster]

17. You're welcome

It's an incredibly efficient system because the market maker's incentive is not for the price to go up or down. He just needs to move lots of shares smoothly, so he reacts instantly to the supply and demand around him. He only makes money when shares move.

A guy pays the NYSE often over a million dollars for the position of market maker for one year. If he collects enough 1/4's of a cent, he can retire after that year, but it's an incredibly risky and stressful year as you can see by watching the stock market for a few minutes even on a calm day.

[HamdenRice]

21. The key to his great explanation ...

is that the people actually carrying out the transactions know exactly what price the last person paid -- it's right there on the stock price ticker. That's why prices don't jump all over the place but change slightly from the price of the last transaction.

Economists call this "perfect information" and it's why the stock market or any other open market or auction market is so efficient.

Could you imagine that when you go into the supermarket to buy, say, a head of lettuce, you could look up and see what price anyone else in your town in any other supermarket had paid for the last sold head of lettuce? If the price in your supermarket was higher, you wouldn't buy it.

[newportdadde]

20. Stocks.

Stocks jump a lot during the trading day back and forth. Check out stockcharts.com and punch in your favorite stock and get a candle chart. You can see open and closes and the range of the trading for that stock during the day. Sometimes they may not be many buyers so you want to be sure when you sell a stock to have a set price not market price. Richard Russell who writes Dow Theory letters once bought something like a 20 dollar stock for 5 bucks because during 1987 when it was crashing nobody was wanting to buy it.

The other day when I purchased some shares of an oil sector ETF I put in a lower bid at 65.00. It had been trading at something like 65.80. But since somoene said market for their sell it found the highest available bid and the price tanked to my buying price of 65 momentarily before recovering. This can happen much easier on a low trade volume ETF then it could on say INTC(Intel).