7 ms·

If the stock market is wrong, what will force it to correct? Does it take a lot of companies going bankrupt? Is it enough for lots of companies to report big

If the stock market is wrong, what will force it to correct? Does it take a lot of companies going bankrupt? Is it enough for lots of companies to report big revenue drops? Or is that priced in the minds of most investors?

roenxi 6y ago
It takes more people selling shares (or being forced to sell shares) than there are buyers. Maybe I have some shares I bought for $10; the price dropped and now I can only sell them for $8. There is a solar farm off to one side selling bonds at some unreasonably high yield. I could be stubborn and hold the shares until the price comes back - but that would lose me money in the big picture. Instead I sell for whatever I can get and put the money where it will be generating a good return. If a bunch of people behave like that, sellers quickly overwhelm buyers (potential buyers are flocking to the new opportunity too) and the price corrects to something reasonably fair.
- ak39 6y ago
  For every stock sold there’s always a corresponding buyer at the market price.
  - ThePhysicist 6y ago
    You might want to look into order books to get a better understanding of the price determination mechanism of stocks/assets: https://en.m.wikipedia.org/wiki/Order_book_(trading) https://en.m.wikipedia.org/wiki/Order_book_(trading)
    - ak39 6y ago
      Thanks for your link. I read it. But does it explain/re-affirm that prices go down when there are more people selling than there are people buying?
      - ThePhysicist 6y ago
        Typically there are different types of orders as well: https://en.m.wikipedia.org/wiki/Order_(exchange) https://en.m.wikipedia.org/wiki/Order_(exchange) For assets with high liquidity there will always be buyers and sellers, depending on how many are on either side and what their price limits are (if they set any) transactions will occur at different prices. Depending on the order size the price can vary even within a single order (if you need multiple buyers or sellers with different limits to fill it). The market price is just an indication of the current equilibrium price at which there is the most liquidity for an asset. If there are more people that want to sell than people that want to buy at a given price the sellers will have to reduce their ask price to close orders, that drags the market price down. The same dynamic moves the price up when there are more buyers than sellers.
      - csomar 6y ago
        There are exactly as many buys/sells. You can't have more "Sellers". The price can move down, however, without much trading. For stocks with low trading/high volatility it might make sense to give the mid order book price rather than last trade.
        rileymat2 6y ago
        Sure you can have more sellers than buyers at a price, you can’t have more transactions, but limit orders can expire or be partially filled.
        ak39 6y ago
        Imagine a closed off room of 100 traders. There are three sets of people here: a group of pairs doing a transaction, a group of pairs negotiating a strike price, no deals yet, and a final group "sitting on their hands". Only the executed trades are ordered in descending timestamps. The one at the top is the market price. It's the only reliable indicator of what actually got sold and bought. So, in this room, the price of each transaction, from any negotiations, is a consequence of the conviction of each party in the negotiations and eventually the trade. This includes how optimistic or pessimistic they feel about the value of the stock, how aggressive each one's stance about the predicted future price of the stock, how much greed or fear exists in the minds of the traders etc. This is what moves the price. Prices can move just as rapidly (be more volatile) with a few traders and many sitting on their hands as can be the case that prices hardly move with the entire 100 people transacting. Conclusion: what moves prices up or down are opposing beliefs with differing levels of conviction in the minds of the traders.
  - roenxi 6y ago
    I can't tell if you are saying that in support or opposition, but yes - the imbalance in buyers and sellers is what causes the price to move until everything matches again.
    - ak39 6y ago
      I am saying that in opposition. Sellers do not overwhelm buyers _when_ the price goes down, or vice-versa. There is no "overwhelming" of one group over the other. Nor do prices go down _because_ of an independent phenomenon other than buying and selling. The price is judged on the _value_ sellers and buyers ascribe to the stock at a given time. If they match, a transaction takes place. In the end there are always exactly equal buyers as there are sellers.
      - angel_j 6y ago
        Unless they are selling to themselves through a triangle of ETFs
        TheOtherHobbes 6y ago
        Or a trip switch has killed trading in an asset - or perhaps the entire market. Buyers and sellers only match under normal trading conditions. Good luck expecting your stop loss orders to mean anything when there's a mass panic.
      - Wh1zz 6y ago
        If more people are interested to sell than to buy, that will create downward pressure on the price - even if in the end for every individual trade there is both a buyer and a seller, that is a sort of "overwhelming", if you think of the buyer as a (name, bid) pair.
      - mewpmewp2 6y ago
        What is meant here is that if we have a closed room with 100 people. If there are 60 investors who want to sell stocks and 40 who want to buy always equally as much for simplification purposes and the price is $50, the price will keep moving down until there's 50 investors who want to sell and 50 investors who want to buy. 40 trades will happen on $50 price, but then there is 20 sellers still left who want to sell at this price. Since there are no buyers, price will go lower and slowly some sellers don't want to sell lower than $50, so there might be 15 sellers left at $45 and 5 buyers, they will do the trade and then there will be 10 sellers left. let's at $40 there will be 5 who decided it's good to buy now and this is where the fair price will have landed, at $40.
- deleted 6y ago
  [deleted]
lend000 6y ago
Perhaps the tax preference should be shifted from capital gains to dividends.
- tonyedgecombe 6y ago
  Dividends should really be taxed as normal income, then you can abandon corporation tax which seems option for multi-nationals.
- votepaunchy 6y ago
  Perhaps we should eliminate dividends and shift to buybacks and fractional shares. Then stockholders could choose when to cash out but would reinvest by default.
  - mindslight 6y ago
    Perhaps W2 employees should get unlimited IRA contributions and no age requirements for distributions.
lordnacho 6y ago
> If the stock market is wrong, what will force it to correct? How about not "correcting" the corrections in the first place? Let the market actually be a market, don't inject huge amounts of money into it? Not to be confused with helping out ordinary people who need money for spending.
- FartyMcFarter 6y ago
  By correct I meant to go to the "correct" value. The premise was that the stock market is overvalued (is this premise true? I don't know).
  - TheOtherHobbes 6y ago
    Actually the premise is "the market is overvalued and therefore there will be a significant correction." Technically the current value is the correct value. The question isn't whether this value is "wrong" - it isn't, by definition - but whether or not Mr Market is delusional and prices will crash at some point in the near/mid future. Explicitly, the distinction is between investors who are looking at fundamentals, and investors who are looking at market momentum and trying to factor in their guesses about politics and Fed policy. If you consider fundamentals, P/E is up to insane levels in a barely functioning economy. If you consider politics - optimism may be justified. Possibly. But if it is - what does that say about the value stock markets are supposed to provide?
dunkelheit 6y ago
Great question! I know of the standard simplistic answer, but still curious about how it works in detail. In theory a share represents your claim on the future profits of the firm and grants you some control over its decisions. So when the prospects of the firm look bleaker, more shareholders will sell, pushing the price down until there is a consensus that the current price fairly represents the value of a share. What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?
rossdavidh 6y ago
Perhaps one might think most companies are either: 1) fundamentally sound, in which case buy on the dip, or 2) going to get bought out by a stronger company, in which case buy in before the sale There might be a few companies that fall into neither group, being so fundamentally unsound that they will simply be shuttered with no sale, but that would surely be a small percentage of the stock market.

roenxi 6y ago

It takes more people selling shares (or being forced to sell shares) than there are buyers. Maybe I have some shares I bought for $10; the price dropped and now I can only sell them for $8. There is a solar farm off to one side selling bonds at some unreasonably high yield. I could be stubborn and hold the shares until the price comes back - but that would lose me money in the big picture. Instead I sell for whatever I can get and put the money where it will be generating a good return. If a bunch of people behave like that, sellers quickly overwhelm buyers (potential buyers are flocking to the new opportunity too) and the price corrects to something reasonably fair.

ak39 6y ago
For every stock sold there’s always a corresponding buyer at the market price.
- ThePhysicist 6y ago
  You might want to look into order books to get a better understanding of the price determination mechanism of stocks/assets: https://en.m.wikipedia.org/wiki/Order_book_(trading) https://en.m.wikipedia.org/wiki/Order_book_(trading)
  - ak39 6y ago
    Thanks for your link. I read it. But does it explain/re-affirm that prices go down when there are more people selling than there are people buying?
    - ThePhysicist 6y ago
      Typically there are different types of orders as well: https://en.m.wikipedia.org/wiki/Order_(exchange) https://en.m.wikipedia.org/wiki/Order_(exchange) For assets with high liquidity there will always be buyers and sellers, depending on how many are on either side and what their price limits are (if they set any) transactions will occur at different prices. Depending on the order size the price can vary even within a single order (if you need multiple buyers or sellers with different limits to fill it). The market price is just an indication of the current equilibrium price at which there is the most liquidity for an asset. If there are more people that want to sell than people that want to buy at a given price the sellers will have to reduce their ask price to close orders, that drags the market price down. The same dynamic moves the price up when there are more buyers than sellers.
    - csomar 6y ago
      There are exactly as many buys/sells. You can't have more "Sellers". The price can move down, however, without much trading. For stocks with low trading/high volatility it might make sense to give the mid order book price rather than last trade.
      - rileymat2 6y ago
        Sure you can have more sellers than buyers at a price, you can’t have more transactions, but limit orders can expire or be partially filled.
      - ak39 6y ago
        Imagine a closed off room of 100 traders. There are three sets of people here: a group of pairs doing a transaction, a group of pairs negotiating a strike price, no deals yet, and a final group "sitting on their hands". Only the executed trades are ordered in descending timestamps. The one at the top is the market price. It's the only reliable indicator of what actually got sold and bought. So, in this room, the price of each transaction, from any negotiations, is a consequence of the conviction of each party in the negotiations and eventually the trade. This includes how optimistic or pessimistic they feel about the value of the stock, how aggressive each one's stance about the predicted future price of the stock, how much greed or fear exists in the minds of the traders etc. This is what moves the price. Prices can move just as rapidly (be more volatile) with a few traders and many sitting on their hands as can be the case that prices hardly move with the entire 100 people transacting. Conclusion: what moves prices up or down are opposing beliefs with differing levels of conviction in the minds of the traders.
- roenxi 6y ago
  I can't tell if you are saying that in support or opposition, but yes - the imbalance in buyers and sellers is what causes the price to move until everything matches again.
  - ak39 6y ago
    I am saying that in opposition. Sellers do not overwhelm buyers _when_ the price goes down, or vice-versa. There is no "overwhelming" of one group over the other. Nor do prices go down _because_ of an independent phenomenon other than buying and selling. The price is judged on the _value_ sellers and buyers ascribe to the stock at a given time. If they match, a transaction takes place. In the end there are always exactly equal buyers as there are sellers.
    - angel_j 6y ago
      Unless they are selling to themselves through a triangle of ETFs
      - TheOtherHobbes 6y ago
        Or a trip switch has killed trading in an asset - or perhaps the entire market. Buyers and sellers only match under normal trading conditions. Good luck expecting your stop loss orders to mean anything when there's a mass panic.
    - Wh1zz 6y ago
      If more people are interested to sell than to buy, that will create downward pressure on the price - even if in the end for every individual trade there is both a buyer and a seller, that is a sort of "overwhelming", if you think of the buyer as a (name, bid) pair.
    - mewpmewp2 6y ago
      What is meant here is that if we have a closed room with 100 people. If there are 60 investors who want to sell stocks and 40 who want to buy always equally as much for simplification purposes and the price is $50, the price will keep moving down until there's 50 investors who want to sell and 50 investors who want to buy. 40 trades will happen on $50 price, but then there is 20 sellers still left who want to sell at this price. Since there are no buyers, price will go lower and slowly some sellers don't want to sell lower than $50, so there might be 15 sellers left at $45 and 5 buyers, they will do the trade and then there will be 10 sellers left. let's at $40 there will be 5 who decided it's good to buy now and this is where the fair price will have landed, at $40.
deleted 6y ago
[deleted]

lend000 6y ago

Perhaps the tax preference should be shifted from capital gains to dividends.

tonyedgecombe 6y ago
Dividends should really be taxed as normal income, then you can abandon corporation tax which seems option for multi-nationals.
votepaunchy 6y ago
Perhaps we should eliminate dividends and shift to buybacks and fractional shares. Then stockholders could choose when to cash out but would reinvest by default.
- mindslight 6y ago
  Perhaps W2 employees should get unlimited IRA contributions and no age requirements for distributions.

lordnacho 6y ago

> If the stock market is wrong, what will force it to correct? How about not "correcting" the corrections in the first place? Let the market actually be a market, don't inject huge amounts of money into it? Not to be confused with helping out ordinary people who need money for spending.

FartyMcFarter 6y ago
By correct I meant to go to the "correct" value. The premise was that the stock market is overvalued (is this premise true? I don't know).
- TheOtherHobbes 6y ago
  Actually the premise is "the market is overvalued and therefore there will be a significant correction." Technically the current value is the correct value. The question isn't whether this value is "wrong" - it isn't, by definition - but whether or not Mr Market is delusional and prices will crash at some point in the near/mid future. Explicitly, the distinction is between investors who are looking at fundamentals, and investors who are looking at market momentum and trying to factor in their guesses about politics and Fed policy. If you consider fundamentals, P/E is up to insane levels in a barely functioning economy. If you consider politics - optimism may be justified. Possibly. But if it is - what does that say about the value stock markets are supposed to provide?

dunkelheit 6y ago

Great question! I know of the standard simplistic answer, but still curious about how it works in detail. In theory a share represents your claim on the future profits of the firm and grants you some control over its decisions. So when the prospects of the firm look bleaker, more shareholders will sell, pushing the price down until there is a consensus that the current price fairly represents the value of a share. What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?

rossdavidh 6y ago

Perhaps one might think most companies are either: 1) fundamentally sound, in which case buy on the dip, or 2) going to get bought out by a stronger company, in which case buy in before the sale There might be a few companies that fall into neither group, being so fundamentally unsound that they will simply be shuttered with no sale, but that would surely be a small percentage of the stock market.