Updated: May 29, 2020
Why do stock prices change? Where does the money go? Those are very reasonable questions that I’ve gotten more than a few times. In this post, I’ll briefly answer them!
Why Do Stock Prices Change?
For a stock with an active market, sellers are frequently listing the stock for sale (the ask price) and buyers are frequently announcing that they’d like to buy the stock (the bid). Many, if not most, of these orders go un-matched in that no one took them up on their offer. However, when someone does, a transaction takes place and therefore becomes the current price.
Let’s look at this from the perspective of both a seller and a buyer of Walmart stock to get a better understanding of how this changes the price (hypothetical current price of $115/share);
Seller: Let’s say you read an article about how Amazon is changing everything and think to yourself, “You know, I think this is really going to put a hurting on Walmart. I should sell my Walmart stock and buy some Amazon stock!”. So you tell your Advisor to sell the stock. He enters a market order into his system that basically says to sell your stock ASAP at whatever price is available (this is by far the most common type of order).
Buyer: A stock trader reads an article about how well Walmart’s grocery pickup service is doing and decides to buy some Walmart stock. After doing her analysis, she decides that Walmart’s stock is currently overpriced and she’s only willing to buy at $114/share. So she enters a bid to buy the stock for $114/share and sets the order to expire at the end of the day.
Since your market order does not specify a price, the stock exchange sees that the conditions are met for both orders, matches them, and completes the trade. Since this is the most recent transaction, it becomes the new current price. The price just went down $1/share, or -0.8%.
How Supply And Demand Affects Price
Remember learning about supply and demand in school? Let’s say that at this exact moment, all around the world, there are 5,000 individuals trying to sell their Walmart stock. At the same time, there are 3,000 individuals trying to buy Walmart stock. Because there are more sellers than buyers the price is naturally going to trend downward.
What alters supply and demand? News. At any given moment, an announcement could be made by the company, the government, an analyst, etc. that has either a positive or negative impact on the future business prospects of the company the stock represents ownership interests in.
If the news is bad, investors get scared and want out, so they’re willing to offer the stock at a discount in order to entice someone to buy. If the news is good, it’ll take more money to entice investors to let go of their stock, so it sells at a premium over the current price.
Where Does The Money Go?
Behind the scenes, at the stock exchange, two orders are matched and a transaction takes place. The ownership of that stock is transferred to the buyer and the proceeds from the sale are delivered to the seller’s account.
But when the price goes up, where does that additional money come from? Or if the price goes down, where did that money go? Think of it like when you bought and sold your last car. It was probably worth a lot more when you bought it than when you sold it, right? Did any physical money actually go anywhere? No. See worth is relative. Something is only worth what someone is willing to pay for it. Therefore, money is relative... but now we’re really getting off-topic lol!
If you’re reading this article, you’re probably either invested or want to be, and ultimately you want to make money from those investments. There are many ways to make money with your money and do so wisely. I strongly recommend that you consult with an investment professional before making any investment decisions. A good Financial Advisor is there to help you make wiser financial decisions and therefore achieve better outcomes than you would have on your own, making them well worth the cost.
All investments carry a measure of risk and may lose value.
All securities through Money Concepts Capital Corp. Member: F.I.N.R.A./S.I.P.C.