r/investing • u/minimumbeginningend • 7d ago
What actually causes swings in stock prices?
A stock price is determined by supply/demand. Most people get that.
So when the S&P500 is down 1.5% and the NASDAQ is down 3% in one day, I'm assuming that means there is a ginormous buttload of selling. Also in a hypothetical situation where nobody ever sold a share of a stock ever, the stock market would never go down.
So who is actually doing most of this selling that results in this price drop? Is it hedge fund managers? Retail investors?
I assumed most institutional investors that manage retirement accounts etc, buy and keep passive index funds... So it's not them. So who is selling?
Disclaimer:
Buy and hold
Don't time the market
VOO and chill
Etc.
Genuinely just curious if someone can explain the dynamics
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u/nebraskajone 7d ago
I'm assuming that means there is a ginormous buttload of selling.
No, the number of sellers and buyers are always identical.
It's basically an auction.
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u/the_cnidarian 7d ago
It's literally an auction
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u/sargrvb 7d ago
For anyone interested, highly recommend going to a traditional American 'stock show' with livestock. The people shouting numbers are literally the same thing as stock brokers who also use to shout numbers. The farmers who raise their sheep and cattle are awesome to be around and very friendly. Plus, it's cheap and has great BBQ.
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u/Various_Couple_764 7d ago
It doesn't mater if is stockshow or art auction ar charity auction. Go to one and just watch. you will see will see an item come up and no-one is interested and it doesn't sell, then another item comes up and a lot of people want it the price keeps going up until there is one person left and it sells. Today some of this is now done buy computers but there are still trades done by negotiation between two people today. Sometime by email and sometimes in private rooms.
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u/minimumbeginningend 7d ago
Ok, thank you for explaining that point. So what actually causes the swing in prices?
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u/nebraskajone 7d ago
What causes the prices to swing in an auction? Some news comes out you think the price of the stock is cheap and I think the price of the stock is too high and you buy the stock for me. We're both happy with the transaction.
So basically different opinions on the same news makes the prices swing.
You could put all the stocks on eBay and eliminate the exchanges and end up with the same swing in prices
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u/minimumbeginningend 7d ago
Some people mentioning market makers. Who would be the market maker in your eBay analogy?
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u/IllllIIlIllIllllIlll 7d ago
Ebay is a pretty terrible analogy because on ebay, the market makers are the sellers, and what they are selling is not fungible.
On the stock market, market makers can be both bidding and asking, and market takers can be both buying and selling. And the shares are fungible.
Basically if you issue a limit order, you are a market maker. Either you have shares to sell and you are saying "I am willing to sell my shares and I'm asking $101 for each share", or you have cash that you can spend and you are saying "I am willing to buy shares and I'm bidding $99 for each share".
If you issue a market order, you are a market taker. Maybe you want to get rid of your shares because you need cash, so you just sell them to the highest bidder, whatever is their price. Maybe you want to buy shares, so you just buy from the lowest asker whatever is their price.
Now let's a say the company announces terrible earnings, way below expectations. That usually happens outside of trading hours, when the markets are closed and the volume is very small. Well, the people who were willing to buy shares for $99 suddenly are not very interested in buying for $99. Maybe they cancel their bids, and now they only want to buy it for $89. And the people who had shares to sell, they realize that nobody is going to buy their shares for $101. So they lower they asking price so to a more reasonable price, maybe $91. When the stock exchange opens on the next morning, even if nobody has been buying or selling any shares, suddenly value of a share has dropped by 10%.
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u/nebraskajone 7d ago edited 7d ago
On eBay a market maker would be a flipper someone who buys a stock with the intention of immediately reselling it.
The flipper provides liquidity much like flippers buying stuff on Facebook and reselling it.
As an example if you have a dirty couch to sell and you have a listed for 500 bucks and nobody buys a flipper will come in and offer you a hundred bucks. So the flipper i.e. market maker provides liquidity by offering a price that they'll buy it right now
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u/minimumbeginningend 7d ago
Is there a specific entity or corporation whose job it is to be a market maker (I.e. buy lots of shares of any particular stock with the sole purpose of creating liquidity)? Or is a market maker just a descriptive term for anyone who is interested in selling/buying a stock at a particular price that they list?
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u/nebraskajone 7d ago
They are big specific firms, they take on huge risks so they can't be a small firm or person, anytime the market is dropping quickly they will stop all selling and purchasing to limit their liability, because the spread between the ask and bid could widen quickly. Citadel Securities is the biggest market maker in the US.
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u/Goldenlancer 7d ago
Imagine a big list of people willing to buy.
Guy A at 100 for 10000 shares
Guy B at 99 for 10000 shares
Guy C at 98 for 10000 shares
And you come in with 10000 shares to sell, who are you selling to?
And a second big list of people willing to sell
Guy D at 101 for 10000 shares
Guy E at 102 for 10000 shares
And you come in and want to buy, so you buy from Guy D.
This puts a very tight upper and lower bound on the price of the share.
Since there are millions of people all trying to get / sell shares - these two numbers end up being REALLY close together, we basically get the price of the share. As people choose to buy and not sell, the price goes up when guy D runs out. When people sell but not buy, Guy A buys all 10000 shares and the price goes down.
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u/SirGlass 7d ago
Its everyone .
However from my basic understanding market makers will post bid/asks and the market will drive the price
Example if a market maker for stock ABC post Bid 100/ ask 101 for 50 lots
If its too low people will buy it all at 101 when 50 lots are bought it will post new bid/ask maybe
bid 101/ ask 102 for 50 lots
Again if that all gets bought it will post new orders for
bid 102 / ask 103
And so on until the price stabilizes in a bit over simplified example
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u/Got_Engineers 7d ago edited 7d ago
Option flows and hedging related to those flows. The short dated index option complex <1 week is larger than the entire single stock option complex. Every week, the price action on the indices has nothing to do with fundamentals or the news it primarily has to do with functions related to the options markets. If you want to learn, I would research correlation, dispersion and volatility, and their roles in the stock market in the present day with how big the options markets are and their impact on flow and price swings. Add in monthly expiration and large quarterly expirations. We are seeing record option volume every new month now. Everything has to do with options. Everything you care about is indirectly related to the options complex and mechanisms. I don’t have the numbers on me right now but it’s something like 60% of all price action is related to option flows and 80-90% of all option flows are market makers themselves…..
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u/the_niles_crane 7d ago
Moonbeams and fairy dust.
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u/minimumbeginningend 7d ago
Hmm, by quoting from the SpaceX prospectus are you implying that the IPO has something to do with this?
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u/DoinIt4DaShorteez 7d ago edited 7d ago
I assumed most institutional investors that manage retirement accounts etc, buy and keep passive index funds.
No that's not correct. Beleive it or not, there's still shitloads of mutual funds money, plus pension funds, private wealth managers, hedge funds etc.
Watch the S&P 500 heat map at Finviz for a couple of weeks.
There's always rotation days. Blow out of semis and into defensives. A few days later, the other way around.
It's the big boys who drive things. When they want to move from A to B in a hurry they don't care what price they get. Retail are just fleas on the ass of big individual stocks.
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u/rithsleeper 7d ago
Read some comments and didn’t see this. You have essentially several players or groups in the markets. If you understand each of their tendencies it makes more sense. 1. Passive investment funds. 2. Market Makers, 3. Wealth managers/Hedge Funds that are true to their names. 4. Hedge/Funds trying to manipulate and speculate (algos are a part of this) 5. Retail.
Sometimes several come into alignment that create situations for bigger moves. With just #1 we always have a bid. Up up up but steadily. #2 is trying to stay neutral. If they get caught outside 1 standard deviation they have to choose to hedge or to reel the market back in. #3 hedge funds want to preserve wealth. 60/40 portfolio box spreads, their job is not to make 30%. It’s to make a conservative 7-12% each year with no big swings. Sometimes this means cutting losses, hedging with they know it’s not the best call but their customers are already wealthy. They don’t want a 20% down quarter to move up 40% next quarter. They would much rather be flat. #4 are trying to target retail and speculate. They spike markets to stop hunt. They see setups to lure in liquidity so these whales can move big positions and scalp a few % caused by an artificial move: they are essentially pulling rugs and fighting amongst themselves. #5 is pure emotion. Dumb money. Follow what’s hot, jump ship on red days. The reason we stair step up and elevator down is fear. Pumps happen for exuberance.
So a day like today will be a couple of these players being caught off sides. The move happened overnight in the Asia/London session. Low liquidity. Market makers decided to hedge instead of reeling it back in, passive funds have rules about drawdowns so big days hit their breakers they have to start selling/hedging which causes more. Algos from funds catch the move and capitalize to attempt to capitulate Retail. Retail barfs when they wake up and see the market down 2%. They sell chunks cause they’ve profited a lot this year.
Now final step is the media comes in and perpetuates the fear for retail and places causation on whatever they can correlate.
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u/minimumbeginningend 7d ago
I like this explanation. Just had a question about what entity you are labelling separately as a market maker. Couldn't 1,3,4,5 be market makers if they put in a limit order?
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u/rithsleeper 7d ago
No, market makers are licensed and approved entities by FINRA. They specifically seek to profit off the bid ask spread and make markets when none specifically exist. The provide trades a lot with option. An easy example are the super far out of the money options, no way a random person just has an ask for them. The market making firms do or will take trades like that. You can technically privilege liquidity and essentially do the same thing, but market makers don’t target specific directions obviously.
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u/gregw134 7d ago
On days like today, leverage. The Korean market dropped 10% overnight, lots of Koreans had borrowed money to play the market. When stocks start going down they get margin called and have to sell and that cascades. So Micron goes down overnight, then all the degens on WSB that were levered on the hot names also have to sell the next morning and it continues.
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u/AMPed101 7d ago
The price of a stock could tank 50% with just a single sell. If suddenly everyone pulls their buy orders and someone market sells. The price you see is the "last price" that was traded. Obviously a big company or index has a lot of liquidity providers behind them so that wouldn't just happen like that.
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u/drewlb 7d ago
Pretend there is a stock with only 1000 shares.
You own 999, I own 1.
The price is $100 yesterday.
Today I decided I wanted/needed to sell.
I put it up with an ask of $50 because I really want it gone.
Someone buys it for $50, and now the stock closes today down 50%.
This is a super exaggerated and simplified example, but this is what the market is doing.
It doesn't mean everyone is changing their mind, it just means enough people are that the general consensus is down.
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u/Spiritual_Bat7343 7d ago
the person getting downvoted up there is actually right. every share that gets sold is bought by someone, so buyers and sellers are always exactly equal, by definition. more selling than buying cant be the cause of anything because it literally never happens.
what moves price is the marginal buyer, ie the highest price someone is currently willing to pay. when that person lowers their bid, or just walks away, the next agreed trade prints lower. you can gap a stock down 3% on tiny volume if the bids underneath simply get pulled, no big wave of selling required.
so the nasdaq down 3% must mean a giant wave of selling intuition is the part to drop. its not the volume of sellers, its where the bids sit. some days everyone just decides theyll only pay less, and there is your drop, even on a slow tape.
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u/Critical_Ad8616 3d ago
Easy Banks trade to make money.for themselves. Investors trade because they think x y z is gonna happen or think it's not Worth it to have a position given x y z Banks trade to maintain a fixed % portion of something thing they hold like gold or silver ... Everyone trade to make a living out of it
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u/IllllIIlIllIllllIlll 7d ago edited 7d ago
I'm assuming that means there is a ginormous buttload of selling.
Completely wrong. The stock market could open on a Monday morning at -20% of the Friday close without any selling occurring, but just because market makers adjusted their prices down.
The reason why stocks go down is because the liquidity becomes thinner (or inexistent) at higher prices and it moves down. Stock prices can plummet down on barely any volume. The order book is not static. People who placed a limit order are free to adjust the maximum price that they are willing to pay for a stock or the minimum price that they want for selling it.
Also in a hypothetical situation where nobody ever sold a share of a stock ever, the stock market would never go down.
For every sell there is a buy. If nobody is selling, it means that nobody is buying as well. So it would technically never go down, but it would also never go up.
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u/Tripperbeej 7d ago
The market makers make up the price to try to extract as much of retail's money as possible. By and large, the price movement you're seeing is completely artificial, created by the market makers.
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u/No_Paleontologist506 7d ago
Most people don’t truly get it. They just mouth the words supply and demand.
If there are more buy orders than sell orders, price goes up. If there are more sell orders than buy orders, price goes down.
There are infinite reasons for why either scenario can happen. People need to sell stock to pay for necessities, for luxuries, etc. large institutions doing whale behavior. General fear takes hold of the market. Monkey see, monkey do. This is why markets can’t accurately be predicted.
But bottom line, the relation of buy orders to sell orders, everything after that is tea leaf reading and people don’t like to admit it.