1
$\begingroup$

This is a very basic question. I can understand that price of goods and stocks change follows the supply and demand law. On the other hand, I find it difficult to understand what happens in the real world.

If I want to buy a particular stock I can buy it at the daily price and I can sell it at the daily price. I can't choose to sell it at a higher price as I would do if I had the only orange in the world and 1 million people wanted that orange.

Who has the ability to start selling a specific stock at a different price? Who initiate the change in price if the demand goes down? Has anyone a practical simple example for me?

$\endgroup$
  • $\begingroup$ Pretty much anyone can place a "limit" order to buy/sell a stock at a specified price, if and when the market attains that price. Or you can simply watch the market and wait for it to reach your target price before buying or selling. $\endgroup$ – Hot Licks Dec 20 '17 at 2:12
  • $\begingroup$ Standard economics textbooks classify stock market as the closest thing to perfectly competitive market, the theoretical extreme. The "limit" orders are still executed at the daily market price. $\endgroup$ – london Dec 20 '17 at 14:46
  • $\begingroup$ I don't see how the limit order changes the price of a stock. $\endgroup$ – Worldsheep Dec 21 '17 at 10:30
  • $\begingroup$ Have a look at my question economics.stackexchange.com/questions/29660/… $\endgroup$ – Hans-Peter Stricker Jun 5 at 13:03
3
$\begingroup$

The “law of supply and demand” is a feature of economic models with supply and demand curves. These are usually mainstream equilibrium models. It is somewhat difficult to relate these models to real world behaviour. I am in a theoretical camp that is critical of such models; perhaps someone else can give a better account.

As for your questions about stock prices, you probably would need to look at the mechanics of stock trading. Investors post prices at which they are willing to buy or sell, and then others will transact at those prices. (In some cases, market makers are the ones posting the price.)

Those participants can change their posted prices whenever they want, typically in response to news. The prices can move without a single share trading hands. This can be interpreted as a shift in the supply or demand curve.

If someone has a big order to buy or sell, they can clear out the first set of posted prices, and transact against other orders. This will result in a price change. For example, assume there are orders to buy 100 shares at \$10 and \$5. An order to sell 200 shares would first clear the best bid (\$10) and then hit the next bid (\$5). In this way, big orders can change prices.

A longer version of this example.

  • There are no existing orders for shares in a company.
  • Investor A puts in a bid to buy 100 shares for \$5. The best bid (highest bid) is now \$5.
  • Investor B puts in an order to buy 100 shares for \$10. The best bid is now \$10. The bid price solely as the result of the new order; there was no transaction that moved the price.
  • Investor C wants to sell, and puts in an order to sell 200 shares. The first 100 shares clears B’s bid at \$10, and the second 100 clears A’s bid at \$5. The prices at which transactions happened was the result of an order clearing out the existing order.
$\endgroup$
  • $\begingroup$ Do you have any nice reference where I could find info about the mechanics of stock trading? Ok it is somewhat more clear now, but who are the "others" in this sentence: "others will transact at those prices"? How they have been chosen? $\endgroup$ – Worldsheep Dec 21 '17 at 10:34
  • $\begingroup$ Others = any other investor. You call your broker, and you give an order to buy or sell that is executed on the exchange. It could be an individual, or an institutional investor, In the real world, there are complications that I have glossed over here (different order types). As for references, you should be able to find something with a web search. You will have decide what is most useful to you. However, just find something introductory, as otherwise you will get hit with complications that have nothing to do with your original question. $\endgroup$ – Brian Romanchuk Dec 21 '17 at 16:00
  • $\begingroup$ I am still a bit lost, I'll check on the web and come back if I have more questions. It would be nice to find a simplified example. $\endgroup$ – Worldsheep Dec 22 '17 at 7:47
  • $\begingroup$ I expanded the example. $\endgroup$ – Brian Romanchuk Dec 22 '17 at 13:45
  • $\begingroup$ What I was missing was the process "get the most profitable bid" and then move the the "next most profitable" and so on. Is this the only mechanism changing prices or there is something else? Thanks! $\endgroup$ – Worldsheep Dec 24 '17 at 9:57

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.