I have a silly question: if I buy stocks then someone sells it and vice versa. But then why does the price changes?
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6$\begingroup$ In equilibrium with the same number of sellers and buyers at a given price, the price will not move. If there are more buyers than sellers as a given price, the buyers that are not filled my increase their price to induce sellers to sell to them, raising the price. Conversely, unfilled sellers, when sellers exceed buyers, will lower their price to induce buyers to purchase--taking the price lower. $\endgroup$– AlRacoonCommented Nov 6, 2019 at 14:11
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2 Answers
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Let's say the risk free rate is greater than zero. But the argument below can be reversed in the case when risk free rate is negative (as is the case these days):
If there is someone silly enough to want to buy a stock at a price of $S_0$ at $t=0$ and then sell it again at time $T>0$ at the same price of $S_0$, then that person is giving money away for free. So the price must change over an infinitesimal interval $dt$ to avoid arbitrage, and all rational investors will try to avoid being arbitraged.
Think about it. The answer lies in the risk-free rate / bank-account.
The non-quant answer is: greed! :) I will always want to sell something at a higher price than I bought it for (which does not mean I'll get what I want).
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In my opinion the simple answer is supply and demand but this would assume we are rational and never buy when it's too expensive or sell when it's too cheap. Investors, Speculators, all types of different agents have motives to buy and sell the way they do.
i'll try to explain it intuitively:
People expect a stock to become more valuable in the future and want to pay a certain price for this right now. On one hand People who are on the buying side naturally want what they consider the best price (Technical, fundamental, or just plain "It will go up" analysis). The Sellers are usually motivated in this scenario by profit taking from the positions they already hold. Then price is set when the buyers match the sellers.
Let's say you bought stock at 50.00€ today and Trump is just tweeting the market is going to go up today expect big gains!. Some people will take this at face value and you assume your stock is worth atleast 52.00€ now. On the other side a buying person might think 52.00€ is a bargain after all it's a great company and trump just tweeted the markets are going to go up so they buy it from you.
Repeat this for thousands of incremental individuals holding stock and you get price movements.
If you have a bloomberg terminal you can use look up any stock ticker and the function "MDM" which shows the market depth in which people are willing to buy and sell at a certain price. Give me a few moments i'll be back in the office soon to provide a screenshot for you.
