An investing riddle: For every buyer there must be a seller...

[arupictb11]

If The price of a stock moves based on more buyers or sellers at any one point then how can there be more of one than the other?? Is it not true that for every buyer there must be a seller and vice verse?

Explain how the price of a stock really moves...

[Ascentrnx]

It's also how much the buyer is willing to pay. If there are expectations of bigger things then a valuation might prove the stock price is cheap and the buyer is willing to pay more.

[AruceAntet]

a stock prices moves based on where the buyers are willing to buy up to and where the sellers are willing to sell down to

if BuyerA will pay up to $11 for 10000 sh of ABC which is currently $10

and the ask book looks like...
1000 $10
1000 $10.01
5000 $10.02
1000 $10.03
1000 $10.05
1000 $10.10

then technically the stock will rise to $10.10 because there arent enough sellers selling at $10 which will cause the stock to rise

[Artisannkw]

This is a great question! If you understand how the price of a stock moves in general, you have a head start on figuring out the movement of a particular stock. Moreover, you are likely to get better prices in all of your trades.

It is easier for me to think of how this works by going back to the pre-electronic market. In the old days, markets were made by people. You had specialists in the NYSE and AMEX, and you had Market Makers for Over-The-Counter stocks, which was where everything else traded.

There was no NASDAQ back then, but the OTC market was regulated by the NASD - the National Association of Securities Dealers. A stock that traded OTC did so through specific NASD members who 'made a market' in that stock. There thousands of NASD members, but there might be only a handful making a market for a particular company.

Market Makers bought the stock for the Dealer's account and published bid and ask prices. These prices were promises to buy or sell the stock at the published bid or ask. But these promises were limited by quantity. To keep the buyers and sellers in balance, the Market Makers would adjust the bid and ask prices if the buy/sell order ratio starts to get out of balance.

[Artisanado]

This whole process is not that different from managing a Sports Book in Vegas. With a Sports Book you keep the dollars even on each side of the bet by managing the odds. With an OTC Market Marker you keep buyers and sellers in balance by managing the bid and ask prices.

This system worked great in a world of relatively stable prices. But the Market Makers' mandate to "maintain an orderly" market was tough to do when the market was moving. When the market moves, the spread between the bid and the ask gets bigger. In theory, the Market Maker adds to inventory in a down market, and sells from inventory in an up market - this in the name of 'maintaining an orderly market'.

These days, much of the function of the Market Makers are computerized. Yet the NYSE specialist still works the floor, and can be key in deciding how to price a stock after significant news. Market 'stops' kick-in if the market is moving too fast for the computer logic to parse properly. And the basic principle of the bid & ask set by a Market Maker still applies.