Why Does a Stock Go Down in Price When There Is a Big Sell Off

Why Does a Stock Go Down in Price When There Is a Big Sell Off?
Stock Prices and Stock Sales
From Mike Moffatt, former About.com Guide
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• financial market
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A reader asks: "Why does a stock go down in price when there is a big sell off or any selling for that matter? Meaning doesn't there have to be a buyer when there are sellers? So if people are buying when others are selling shouldn't that equal it out and the stock price stay the same?"
Thanks for your great question!
You are absolutely correct when you state that there has to be a buyer when there are sellers. The number of shares sold of a particular stock on a given day has to equal the number of shares purchased of that stock on that day. On the stock market, this is referred to as the "volume".
The relationship between the number of goods sold and the number of goods bought holds in any market, not just the stock market. The number of ski jackets sold by a retailer must equal the number of ski jackets purchased by customers. However the price of ski jackets doesn't necessarily stay the same. The retailer may decide to have a sale (which can be considered a sell off) on the jackets if it's July and the demand for ski jackets is low.
The stock market works in a particular way. To use an example from a recent event, suppose a major pharmaceutical company (we'll call them Company A) just had its supposed new wonder drug banned by the FDA. Shares in that company at the current price are now less attractive to both current Company A shareholders and those considering purchasing shares in Company A. This will cause those interesting buying the stock to demand a lower price to accept Company A shares (known in stock market lingo as the "bid price") and those interesting in selling Company A shares to offer a lower price in order to get rid of the shares (known as the "ask price"). Eventually a buyer and seller will agree on a price (meaning that the "bid" and "ask" are identical) and shares will be sold. This price will naturally be lower than the price the shares were selling for before the bad news came out.





Everyday, all kinds of people publicly tell us why a stock would go up or down in the near future. Sometimes they talk about earnings, other times they talk about the economy but at the end of the day, stocks go up and down based on basic supply and demand.
Stocks Go Up when People Want to Buy Them
A stock price at any particular moment in time is based on the record of the last transaction where a buyer’s bidding price matched a seller’s asking price. It doesn’t mean that you would be able to buy or sell it at that price, so it technically represents a best estimate of how much the stock is worth in a particular point in time.
When more buyers are present, they will in effect need to increase their bids, pushing the stock prices higher (assuming sellers are willing to sell).
Stocks Go Down Because Everyone Wants Out
On the other hand, when a stock is hated, everyone wants to sell them. This pushes the price that buyers want to buy them at and the transaction price keeps going down, pushing the stock price lower.
Sure the reasons for stocks to go down might be because of bad news or an earnings miss or whatnot, but if no one wants to sell the stock, the price will not go down.
Why This is Important
Having realized this fundamentally helps us make sense of the ilogical. It will help us understand why stocks go down the day when there’s no news and help us understand why greed and fear play such a large role in this market. It will help us understand that short term, there is no way to predict which way a particular stock will go unless we are masters of psychology and can pinpoint every shareholders’ sentiment.
From now on, do our analysis but understand that the direct reason of why stock prices change is still because of supply and demand.
Tagged as: Fundamentals, Share Price



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