We often hear that stock prices rise because there are more buyers than sellers. Critics like to mock this way of thinking by saying that in every trade, there is a buyer and a seller, so there can never be more buyers than sellers. I think this is just being argumentative.
At a given moment there can be more traders interested in buying a stock than selling that stock. This causes the price to rise so that more traders are enticed to sell and some potential traders are discouraged from buying. This continues until buying and selling interest gets back into balance.
So, we can give the full long-winded explanation, or we can just say “buyers outnumbered sellers.” I can understand if some people don’t like the short form, but that doesn’t make the people who use it wrong. Critics can accuse them of being unclear, but calling them wrong is just being argumentative.
If we want to be even more precise, we shouldn’t be counting just buyers and sellers, but weighting them by the number of shares they trade. This all works in reverse when stock prices drop because “sellers outnumber buyers.”
A valid criticism is that this “explanation” for stock price movements is vacant. Sometimes people say “buyers outnumbered sellers” just trying to sound smart. Whenever stock prices begin to rise, it’s because there is more buying interest than selling interest at the current price.
Even when I disagree with people, I prefer to clarify what they mean rather than nitpicking at the words they choose. Clearly, I’ll never make it as a politician.
To paraphrase Downton Abbey, you are not arguing, you are explaining. Would more Bargain Hunters be an explanation for dropping prices too?
ReplyDeleteIt's true that every share traded has both a buyer and a seller. If there is just one big buyer and lots of smaller sellers, that buyer could still be setting a price that is above or below the recent range so it doesn't necessarily dictate a direction.
ReplyDeleteI think there are two truer versions of this:
1) If there is just one big buyer, the price could drop a lot more when they withdraw from the market compared to having a lot of small buyers willing to pay the same price. Again the order size matters somewhat but the popularity of the opinion likely does have an effect.
2) If one side is mostly using limit orders and the other side is mostly using market orders (a difference in price sensitivity), that will push the price in one direction even if the "number" is balanced (as it is by definition when you count shares traded).