How do stock prices change?

Question

I understand stock prices are determined by supply and demand. If I own a share in some company and more people want to buy it than there are sellers available, my share value will go up.

My question is the intricacies of this process. I only know my share has gone up value based on what I see in my brokerage account. Meaning I don't intrinsically know my share has gone up in value unless somebody/something else tells me it has. How does this work?

Another question I have about stock prices is this: Tesla right now is priced around 180$ per share. It usually trades tens of millions of times a day. Now imagine trading is forbidden one day for everyone except for one seller and one buyer. They exchange a single Tesla share at 200$. Is it true that once trading is open again to everyone, the stock price at that opening moment is 200$ per share (as opposed to 180$ previously from the tens of millions of trades)?

Answer 1

The suggested duplicate is correct from one point of view, but not necessarily the one I believe you need.

Meaning I don't intrinsically know my share has gone up in value unless somebody/something else tells me it has. How does this work?

If you own a stock, the "price" that is meaningful to you is the highest price at which someone is willing to buy the stock. That is reflected in the "bid" price on an exchange. That's not necessarily the "last" price that was traded - just because someone was willing to pay $X for a stock a few seconds ago does not necessarily mean that there is another person also willing to pay X.

On the other hand, if you want to buy more stock, then the price that is meaningful is the lowest price at which someone is willing to sell stock, which is the "ask" price.

Depending on your intent, either the "bid" or the "ask" is the actual "price" that you should be concerned about. Analysts, who are not on either side, will sometimes use the "last" price, or midway between the bid and ask, depending on their objective.

So in a way, it is someone else telling you want the price "is" - but that price is determined by how much they've told the exchange that they're willing to trade at. If you accept that price then you can trade your stock.

Now imagine trading is forbidden one day for everyone except for one seller and one buyer. They exchange a single Tesla share at 200$. Is it true that once trading is open again to everyone, the stock price at that opening moment is 200$ per share (as opposed to 180$ previously from the tens of millions of trades)?

This also depends on your perspective as above, but just because one person was willing to pay $200 does not mean that there is another person willing to pay $200. The next highest person may only be willing to pay $180.

So from a certain point of view (e.g. if someone is analyzing actual trades), yes $200 may be the relevant "price", but it does not necessarily mean that you can actually trade at that price.

Answer 2

Let me discuss this as it used to work in the old days before everything became electronic. The principle is the same, but it's more complicated today.

Say you want to buy some stock in XYZ Company. You place an order with your stock broker. In the old days the broker would go to the floor of a stock exchange and go to the area where they were trading XYZ. Then he would shout that he wanted to buy (say) 100 shares of XYZ at $50 per share. Someone willing to sell would say $55. They'd dicker a bit and settle on a price and then make the sale. If there were more people who wanted to buy than wanted to sell, the seller could say, "No, I'm not taking $50, this guy over here is offering $52." Or if there were more sellers than buyers the buyer could say "No, I"m not going to give you $55, this guy over here will sell for $53." At some point the price would get high enough that some number of buyers would say forget it, I'm not going to buy at that price. Or it would go low enough that some number of sellers would say, Never mind, I'll just hang on to it, maybe see if I can get a better deal next week. And so the price would settle on a number where the number of shares offered for sale at that price was equal to the number that people wanted to buy at that price. As all the buyers and sellers were in one room, the market was very "efficient" in an economist's sense: everyone had all the information about what was being offered and at what price.

For this to work they had to keep the number of buyers and sellers manageable. There might be 10,000 people who want to buy General Motors stock today, but it would be impractical to get them all in the same room. So they would sell a limited number of "seats" on the stock exchange to brokers, who would then represent their clients.

This means that if you're a typical small investor, you don't directly participate in the negotiation. You tell your broker you want to buy XYZ Company, and he goes to the exchange and gets the best deal for you that he can get. Ultimately, your buy and sell decisions, when aggregated with all the millions of other small investors in the world, determine the price. But you as one person have very little influence.

It's just like, if you buy a toaster at Wal-Mart and the price tag says $10, that's the price and you can take it or leave it. If you go to the store manager and say "I'll give you $9 for this toaster, that's my final offer", he's just going to look at you funny. But if a thousand customers look at that toaster and say, "I'm not going to pay $10 for that. Maybe I'd pay $9", ultimately Wal-Mart will drop the price to $9. Or if they find that they put toasters on the shelf for $10 and they sell out in five minutes, they'll try upping the price and see what happens.

What if someone wants to buy but no one wants to sell? Or vice versa? The stock markets have "specialists" who pledge that they will buy or sell some stock as the buyer/seller of last resort.

When a stock is bought and sold many times in one day, the market will quickly settle on a "going rate". There are some stocks, especially smaller companies, that may go many days without a trade. These get ... fuzzier. Like just recently I wanted to buy a certain stock, I saw the last offer was for like $90 a share, so without doing any research (idiot ...) I said ok, I'll buy it at $90 a share. My broker called me and told me the going price for that stock was more like $20 a share, but it was infrequently traded so $90 was the last offer. He asked if I really wanted to buy at that price and I said no thanks, thanks for letting me know.

So regarding your hypothetical: If you were talking about a frequently traded stock, that just would never happen, so the question is meaningless. For an infrequently traded stock, a good broker would say, "Hmm, yesterday the only sale was for $200, but three days ago there was a sale for $180." And he'd bid $180 and see if there were any sellers at that price. If not, a good broker would ask you what you want to do. Web trading sites that I've used require you to set a maximum buy or minimum sell price. So like if I see that the going rate is $180 despite that unusual high sale yesterday, I might say that my maximum bid is $182, and if no one will sell at that price within 24 hours (or whatever period), the buy is cancelled.