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How Can There Be “More Sellers than Buyers”?

Quick housekeeping note: There will be no article this upcoming Friday (10/16) or Monday (10/19), as I will be attending the annual Bogleheads conference this week, and I want to be able to devote my full attention to it. We’ll be back to our regular schedule as of Friday 10/23.

A reader writes in, asking:

“Sometimes I hear on the news that there were ‘more sellers than buyers today’ and that caused a stock, or the stock market, to go down. How can this be possible? Isn’t it the case that there has to be a buyer for every seller, otherwise there would be no transaction?”

Yes, you’re absolutely right. When people talk about there being more buyers than sellers (or vice versa) over a given period, they’re using sloppy wording, for two reasons.

First, it’s not the number of buyers and sellers that matters, but rather with the number of shares that people want to buy/sell. (After all, one huge buyer can drive up the price of a stock, even if they’re the only one buying while many different people are selling.)

Second, there does indeed have to be a buyer and a seller for each transaction to occur.

When people say that there were more sellers than buyers, what they really mean is that, at the opening price (i.e., the price of the stock at the beginning of the day) the number of shares that people wanted to sell exceeded the number of shares that people wanted to buy. (In economics jargon, quantity supplied exceeded quantity demanded.)

Or, to illustrate using the type of chart you’d see in an economics course, the price of the stock would be at Price A in the following picture — where quantity supplied exceeds quantity demanded.

SupplyDemand

So, in order to get rid of the shares they want to get rid of, some sellers lowered their price. And that lower price attracted buyers who would not have bought at the previous, higher price.

And, eventually, a new (lower) equilibrium price is reached (Price B in the chart), where the quantity supplied is the same as the quantity demanded — or where, in the common but sloppy phrasing, there is a buyer for every seller.

Of course, in our modern high-speed stock market, this process does not take an entire day. It can happen in a matter of minutes or even seconds. And, in the complex real world, it’s not a smooth one-directional process that results in a stable equilibrium stock price. Rather, it’s a never-ending back-and-forth sort of thing.

But the general microeconomic principles that determine the prices of other goods and services are the same principles that determine the prices of stocks. That is:

  • When the number of shares that people want to buy at the current price exceeds the number of shares that people want to sell at the current price, the price will go up.
  • And when the number of shares that people want to sell at the current price exceeds the number of shares that people want to buy at the current price, the price will go down.

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