Number of buyers = number of sellers?
Stupid question - there needs to be a buyer to each sale. So in a huge selloff, who's buying the stocks people are unloading? So why is it called a 'selloff' then, if in the end the number of buyers will equal the sellers? If number of buyers equal sellers, then why would the market crash since there's an equal number of people loading up on those stocks that investors are fearful of? Similarly, how does 'sentiment' even exist when number of bulls = number of bears?
I imagine the buyers will be mostly investment managers who have stop buy orders. I imagine that, in a selloff, although number of buyers = number of sellers, put orders are more than call orders, pushing down the price, and a lot of people can't get their sell orders filled.
Similarly, wouldn't every trader second-guess himself in every trade (especially in an emotional selloff) when he knows that someone else is willingly taking the opposite side of the trade?
Strictly speaking, there do not have to be the same number of buyers as sellers. The number of contracts bought and the number of contracts sold have to match, but the numbers of actual people or institutions do not.
This balance also does not preclude price swings. Say that stock x was trading at 50 dollars today, and tomorrow company y is going to buy company x at 500, what do you think the price will do? Unless the deal is almost certain to fail, sellers no longer think that 50 is a fair price because company y may eventually take it off of them for 500. But because there is still some uncertainty, and the deal failing would see the stock go back to 50, they can’t ask for 500 either. So the stock jumps to 350, which for a buyer betting that the acquisition will succeed, sees as attractive. Every trade at 350 still involves a buyer and seller on each end, but the price that either one of them or both are willing to pay/sell it for has changed. That’s what causes price swings.
And yes, because there is always someone on the opposite side of the trade, you should be uncertain. Nothing in life is certain. There are plenty of people who choose other jobs too. Does that make you second guess yourself?
The price moves to clear the market. It is called a selloff because the pressure is coming from selling, when sellers can’t find buyers, the price needs to adjust lower until it clears. Similarly, when prices are rising, you get the opposite (buyers willing to pay more, sellers increasing the price). Take an example where a stock trades 1000 shares a day, and someone wants to unload 1000 shares. There won’t be buyers (or they will just be chipping away at that block), if the seller needs to sell more/faster they need to lower the price to get more people involved.
As for someone on the other side, 2 points: 1) people will always disagree, so you should always be a bit paranoid you are wrong and 2) you don’t know the reason someone is taking the other side (and they don’t know yours), they could be hedging, going long and short, etc.
Imagine you own a house in a rich neighborhood, let’s say for a million dollars. Now there’s a news that there’s a POSSIBILITY of earthquake in that area. Hearing that the entire neighborhood starts panicking, and people put their houses for sale. Maybe the first few sellers get it at the rate they bought, but when everyone (buyers) realizes that there’s something going on, they might want to pay less. Consequently, the prices keep going down, because only a few people want to take the risk of losing their money by buying your house. So instead of selling at a million, you might have to put it for sale at like 700k or so, to attract people. That way some risk lovers might think it’s worth it, and a trade might happen.
That’s the essence of the market
Hmmm so idk if this is relevant to the discussion and your analogy but in that case the buyers are not from the neighbourhood right? OR they are from the same neighbourhood, but are among the select few who are smarter than others so they know the possibility of earthquake is low, so they patiently wait to snap up cheap houses. So is it the same for a stock selloff? Thanks
Could be from the same neighborhood thinking - “yeah I’m getting this house for cheap, maybe I’ll sell it for a little more, instead of keeping it forever” or “I could just buy it, and see what happens”
Or from outside the neighborhood who either think the possibility of earthquake is super low and it’s steal of a deal, or just some newbie who thinks they’re getting a great price.
Either way, sell-off happens, when more people are selling than buying, driving down the prices (to attract buyers and reduce their risk/exposure whatever you want). Rally happens when there are more buyers, increasing the demand for a limited supply, thus driving up the price of the goods.
Lmao
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