What really moves the PRICE of a stock?
The instantaneous change in equilibrium between Supply and Demand.
"If you cannot explain something in simple terms, you don't understand it." ~ FeynmanDear Aspiring market enthusiast,
Today I am going to explain to you in the simplest of terms, what and who moves the PRICE.
Be it a commodity like metals or an agricultural product like rice, or stocks in the stock market.
I will try and make it as non-technical as possible. The idea would be to make you understand the underlying concept.
I will use the example of Mango prices to explain this clearly.
Supply & demand:
At any point in time for a trade to occur, there are 2 parties at play. Sellers who have the product to be sold, & Buyers who are willing to buy the product.
The quantity of product the sellers are ready to sell is called Supply. The quantity of product the buyers are ready to buy is called demand.
But just the mere presence of both parties namely the sellers and the buyers is not enough for the trade to happen. There has to be an agreement in the bid and ask prices. Now what's that?
The Ask price is the price that a seller quotes for the product. The Bid price is the price at which the buyer is ready to buy the product.
Now you can imagine, any discrepancy in this and no trade is going to take place. The moment a seller's ask price equals a buyer’s bid price (or vice versa; when a buyer's bid price matches the seller's ask price), a trade will take place immediately.
This is the latest price which gets printed on the sale column. This is the market price.
Wait. Technically, this statement is not entirely true. There is always a small difference between the bid price and the ask price in a Market order. This is called the bid-ask spread. In a market, buyers and sellers don’t meet directly, but via a market maker. A market maker buys from a seller and sells it to a buyer. There is a small price that he keeps as his cost of doing business, this small difference is the bid-ask spread. Wait till you get to the mango example and you will understand it clearly.
Now how does the price change?
As long as there is a buyer and a seller available at that last trading price, the price will not change. There is an equilibrium here. Although there is continuous trade taking place i.e. the product is exchanging hands continuously, the price remains constant (nearly).
For the market price to change, this equilibrium has to shift either toward the buyer or the seller.
For the price to increase, All the sellers have to quote a higher sell price and buyers now have to accept that (There should be no seller willing to sell at the previous price).
For the price to decrease, all the buyers have to bid a lower price and sellers have to agree to accept that. (There should be no buyer willing to buy at the previous price).
In the Stock market, all of this happens at such a blistering pace that the market price change appears smooth and continuous most of the time.
But let’s now take the example of Mangoes to see the same phenomenon at a pace that is easily comprehensible to you. Ready?
How do Mango prices change?
Imagine your favorite Mango. Done? (Let’s imagine it, Alphonso)
Now, recall what was the price of 1 kg of Alphonso in April.
What’s its current price in May and June?
What’s the price going to be in July or August?
Here is what it looks like (hypothetical this chart is, but you understand the point).
Mango prices start high. This declines at the peak of mango season and again starts rising during the end of the season. But why does this pattern occur?
To answer this, let’s see what’s happening with the Supply and demand of mangoes:
Supply = Amount of mangoes being produced (Mango farmers).
Demand = No. of people willing to buy mangoes to eat (Mango eaters).
During April, there is a very less supply of mangoes. Most mangoes are not ripe and are still on the tress. There is some demand as people are reminiscing about their favorite mango they ate last year. They want to taste it again. But there is less supply to meet the demand. Hence the prices are high.
But do you go to the farmer directly and buy the mango? No right.
Where do you go? To the supermarket or the roadside vendor, or the local shopkeeper. These are the market makers (remember bid-spread ask?).
They buy from the farmer (sellers) and sell to you (public) at a slightly higher price. The price difference is their cost of doing business. Cost of the risk they are taking. The same thing happens in the stock market as well. Ok, let's move on and see, how the price of mango changes from here.
As we move towards peak Summer, the supply of mango steadily increases. There is mango everywhere. But the willing buyers have stagnated. i.e. demand is flat but supply has increased. Mangoes are not getting sold at the previous higher prices now.
What do the sellers do?
Start quoting lower prices to sell their mangoes. Hence the new price printed is lesser now.
The reverse of this happens when summer is coming to an end. Supply starts to get exhausted. there are no more mangoes on the tree. But there is still demand. People still want to eat the mangoes before they vanish for the year.
Sellers now start to ask for higher prices now. those who can afford it still buy at higher and higher prices and prices start to rise again.
(Note: For ease of understanding, this is a very simplistic model of how mango prices work. In reality, prices are influenced by conditions of perishability, ease of storage and transport, etc.)
So, The instantaneous change in equilibrium between supply and demand is what moves price. Scarce supply moves the price up. So does huge demand. While more supply and lowering demand push the prices lower.
This is the only truth of price.
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Some Peak Scanners for you:
Pullback to 10/21 ma: https://chartink.com/screener/copy-shpb1021
VCP (long-term timeframe): https://chartink.com/screener/shvcp-epic-modified
sector rotation/ Relative strength dashboard:
https://chartink.com/dashboard/177929