I would appreciate it if one or more of the smart people on this blog can explain the following : what causes individual stocks prices to change – be it higher or lower ? For every seller there has to be a buyer, so what exactly is causing a stock price to move up or down? What determines how much that movement will be ? Is there a mechanism that continuously, and at millisecond or nanosecond intervals, keeps track of the number of sell orders waiting in a queue for a buyer ? If so, how does this lead to a .25% gain or loss in a stocks value vs a 0.5 % gain or loss ? Twice as much of “what” has to take place to go up or down 0.25% vs 0.5 %. Is it something else ?
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The wind and a tweet at this point…all fundamentals seemed to have left the room.
Hello Mark, I’m a bit hesitant to reply because you invited response from the “smart people of this blog”, and I belong to the other group :). But I’ll try a short answer in case it gives you some idea.
I think your question is about “why stock price changes”, not “how is stock price determined”. This is how I understand (which can be entire wrong):
The short answer is that the stock price at any moment is based on the aggregate view of the active market participants about the expected future course (of the profit) of the particular company. Any time there is a change in the expectation about the future, either in light of new information, or a second thought/reassessment on part of some investors, the aggregate view of the expected future course shifts, and so does the stock price. Note that the expectation of the future includes both fundamental assessment of the business, as well as investor sentiments (optimism or fear). This makes the price so unstable and volatile.
How much the movement will be is determined by the equilibrium price point where both the buyer and the seller feel that this is the best deal they can get. If there are too many buyers, the seller will look for a higher price for the best deal (Price goes up in overly optimistic market with many willing buyers). If there are too many sellers, the buyer will look for a more bargain price (Prices drop in panic scenario with too many sellers looking for exit).
About the “queue of sell orders”, conceptually how the stock exchanges function. The “sell orders” queue and the “buy orders” queues are matched by their respective order prices (and number of shares). If the highest price of the buy orders is below the lowest price of the sale orders, no trade will take place unless the traders update their orders to match the price. Sort of a very active bargaining process with lots of buyers and sellers involved for the same items. In reality, the operation is much more complicated with many other participants.
Not sure if this overly simplified summary is generally accurate, or if this answers your question (apologies if this confuses you more). Like I said, I sit alone in the idiots’ corner of this forum :).
Sanjib. I very much appreciate you trying to explain this. I think you did a good job of laying out a framework for how things work. Nonetheless, and not your fault at all, I have numerous questions about what you wrote. I would need an actual conversation with its back and forth and nuance, to get a better understanding (wow, two or more people talking in front of one another – imagine that in 2025 !). To be honest, this still seems to be a great big black box of sellers and buyers which magically leads to stock prices going up or down.…..
Mark, I understand. Talking to a person is more effective when it comes to questions like this or many other investment/financial matters.
I founded a small 501(c)(3) non-profit for exactly this reason: give 1:1 lesson on various investment topics. It’s completely free with no strings attached. If you’re interested, I (or another director) can have a couple of video chats and try to answer your questions. You can find some pointers about our non-profit on my profile. If you wish, you can email us at contact@dollarmentor.org and we’ll take it from there. Once again, it’s a 100% volunteer-driven organization- we don’t charge anything, ask for donations from the candidates, refer to professionals, earn commissions or try to make any economic gains whatsoever from our voluntary services.
You are definitely not in the idiots’ corner, Sanjib, but there’s a reason that this place of sharing is called “Humble Dollar.” Thanks.
Micheal Lewis’s book “Flash Boys: A Wall Street Revolt” gives a small window to your question, very small despite its 320 pages.
“A little learning is a dangerous thing”
Alexander Pope, 1709
Please share with us the answer…….no matter how small !
Warning: I am spreading my dangerous little learning below as requested. Here at the Humble Dollar, I presume readers are not traders.
Every seller and buyer want “the best price” but who decides what is the best price? The investment bankers, brokerage houses, the exchanges, high-speed day traders (by definition those who want money without owning any stock), all other market participants want a cut of that transaction. Zero transaction fee is a marketing ploy to hide and snatch the real cost of transaction (Robinhood reported 2024 Q4 earning of $672M from zero fee transactions). Competition among the predators is fierce, with fast computers located next to the exchanges, fast private transmission lines and towers (to discover the existence of any pending transaction), private “dark pools” to hide these sell / buy offers, kick-back alliances, hundreds of the best minds or Ph.D.s in algorithm got employed in this warfare. The government (SEC) tried to enforce fair play with rules – nice try. None of these participants know why prices changes faster than a blink of an eye (0.2 second). If anyone discovered a reason, that entity raised the counterattack to defend its practice, even if it took billions of dollars. The attack and counterattack are endless and nonstop. Every day, the buyers get the stocks at a higher price, the sellers get a fraction of the payment, the rest goes to investment bankers, high-speed day traders, exchanges, brokerages, market makers. A billion here, a billion there, pretty soon it is real money extracted from stock transactions.
The recommended book was published in 2015, and the trading environment has changed, just like the weather. Last I learned that the dark pools are getting bigger and darker, hence even fewer participants know who decides “the best price”. Not mentioned in the book (hence it revealed only a small window) were the price volatility added by futures trading and option trading (big deals done by Hedge funds).
Thanks for your succinct explanation, Quan, and the book recommendation.