Supply and Demand in stocks

I haven't been able to find a real good article on supply and demand as it relates to stock.

I probably will ask a financial forum but I thought I would ask here first for the fun of it.

In a general opinion, how much do you think supply and demand affects stock prices in a percentage level? Do you think a massive drop off of stock prices in 1 day could be 90-100% affected simply by lots of people selling stocks and not many people buying?

I know there are other determining factors that affect stock prices. Like general fear and loathing could drop a stock price even though many people aren't selling. And company's posting bad financial news could also drop the stock. But I'm wondering if you believe the supply/demand has the biggest affect?

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Comments

HeroPsycho

I don't mean to sound like a jerk, but it's all supply and demand. Supply and demand determines the trading price of stocks or anything else in a free market. Positive news generally increases demand for a stock. Negative news decreases demand. If lots of people are selling, then supply of stock goes up and price goes down. Etc. etc. Fear and loathing causes people to sell and not buy, thereby increasing supply and decreasing demand. If stock prices dip too low in people's mind, they'll begin buying, thereby decreasing supply and causing prices to go up. When people see prices go up, they generally tend to buy, thereby reducing supply further and creating additional demand as people tend to lose the fear and loathing as you described it.

Are you thinking about buying/selling individual stocks? If you're doing so as a true investment vehicle, I would suggest looking at index funds instead.

Hyper-Me

Last week Palm announced that sales of their phones on Verizon "didnt meet expectations". Which doesnt mean they didnt sell any, just not as many as they thought.

Their stock lost nearly 1/3 value in one day.

Yeah...stocks are mostly speculation.

Sort of how gas "experts" "speculate" that we will use more gas in such and such month so they jack the price today.

HeroPsycho

Hyper-Me wrote: »

Last week Palm announced that sales of their phones on Verizon "didnt meet expectations". Which doesnt mean they didnt sell any, just not as many as they thought.

Their stock lost nearly 1/3 value in one day.

Yeah...stocks are mostly speculation.

Sort of how gas "experts" "speculate" that we will use more gas in such and such month so they jack the price today.

I think a better analogy of stocks is sorta like temperatures in a specific location. You can have from day to day wild swings in high/low temperatures, but you can also see generally overall a raising of temperatures in summer months and lower temperatures in winter months. The trick is look at the trends over a period of time.

Stocks are mostly speculation if you speculate. If you buy and hold, they aren't, much like predicting the trends of temperatures by season.

I buy and hold because it's very very difficult to make money consistently by speculating, and those who do know way way more about it than I ever would, and I'm still not convinced they'll beat me consistently in the long run anyway. So I buy low expense index funds diversified by size of businesses, risk, international/domestic, various bonds, etc. and sit on them. Doing this bets that the stock market over the next 30 years until I retire will go up, which I believe is a pretty darn sure bet even despite recent history. I'd rather do that than roll dice on individual stock.

Mrock4

Just while on the subject, it's important to note that a more surefire way to financial freedom is "hanging in there" in regards to rough times with the stock market. Most people who sell early usually regret it later on. It's been proven that- with few exceptions- holding onto stock is generally a much better idea than selling it. This is of course assuming you've already developed a sound, diversified portfolio. Knowing when to bail is another important skill to have, but as said before, it's all speculation, so that's hard to figure out sometimes. Even the professionals that live on the stock market have trouble staying ahead of the game.

HeroPsycho

Mrock4 wrote: »

Just while on the subject, it's important to note that a more surefire way to financial freedom is "hanging in there" in regards to rough times with the stock market...

I'll up the ante a little. When the market tanked, I invested more into the index funds I was investing in. When it occurred, I fully funded my Roth IRA as soon as I had a decent emergency fund. A $5000 contribution into my Roth IRA last July is now at $6,000. A 20% return over less than a year's time ain't too shabby.

And yes, this should only be done when you have a properly diversified portfolio you're just building your investments in.

eMeS

Mishra wrote: »

I haven't been able to find a real good article on supply and demand as it relates to stock.

I probably will ask a financial forum but I thought I would ask here first for the fun of it.

In a general opinion, how much do you think supply and demand affects stock prices in a percentage level? Do you think a massive drop off of stock prices in 1 day could be 90-100% affected simply by lots of people selling stocks and not many people buying?

I know there are other determining factors that affect stock prices. Like general fear and loathing could drop a stock price even though many people aren't selling. And company's posting bad financial news could also drop the stock. But I'm wondering if you believe the supply/demand has the biggest affect?

Much more than most people realize.

Market makers, the people/companies who really set the price of equities, work on pure supply and demand. They have a certain "supply" of either stocks or buyers and have to work to balance supply with demand.

These days, equities move some on news, etc.. However, what really moves price is a large influx or outflow of capital from a mutual fund, etf, or sovereign fund.

This is classic supply and demand. More money chasing fewer shares drives up price, just as more shares and fewer buyers drives down price.

I worked in a place where we had to configure special monitoring that watched fund manager and fund's trading files. Many people were caught over the years trying to view these things to get an idea of what trades a fund or fund manager might make. Then they could buy or sell the equity before the fund did and cash in. I've simplified the situation here, but that's the basic gist of it. Problem is, that's all illegal. I've seen people go to jail for this....

MS