Why Do Stock Prices Rise & Fall? No Dumb Questions About the Stock Market
- Kevin Lankes
- Apr 12
- 6 min read
Watch on YouTube: https://youtu.be/Umxhj-xYgYs
What’s up, my digeridoos, it’s no dumb question Thursday! And even though it’s not Thursday, we’re going to talk about what actually causes the stock market to move. What makes these stock prices go up or down? Let’s get into it--let’s find out.
The first stock ever issued was from the Dutch East India Company in 1602. Stocks are shares of equity in a given company. They’re like pieces of a pie, hopefully key lime in my case or lemon meringue, or we get rid of pies altogether and I’ll take cheesecake. Companies enter the public market to raise money. They let people buy shares in exchange for operating revenue. So a company enters the market with a number of stocks that’s equal to the percentage of the organization they’re willing to give up control over. When you buy stock in a company, you don’t technically own that amount of the company but you do have control over it, and you’re entitled to rights and profits in relation to the amount of stock that you own. So if a company has a hundred shares and you own one share out of those hundred, then you control one percent of the company. Shareholders can vote in meetings, and they receive profit in the form of stock dividends, but sometimes those are reinvested into the company instead.
Most stocks are traded on stock exchanges. There a number of these, like the New York Stock Exchange, The London Stock Exchange, the Tokyo Stock Exchange, the NASDAQ, etc. A company will do an IPO or initial public offering, and then the amount of stock they choose to sell will be available to trade. So then the price goes up and down and all around and we have dumb question Thursday to find out why.
Fiscally conscious nerds will say it’s all about supply and demand. More analytical-leaning higher-tier information sources about the market like the Motley Fool will say stock price changes are driven by “information.” But what does this mean practically, and how can we be convinced that it isn’t really all just vibes?
Well, when you want to buy a stock, you usually get yourself a brokerage, these days it’s an app on your phone or it’s a website. I had a full Fidelity desktop application that was really cool but I couldn’t use it because I’d just sit around staring at the glowy numbers moving and just not get up for hours at a time. And when you set up an account, and you want to start buying stock, you have two options. You can do what’s called a market buy, or you can do a limit buy. A market buy is that you’re just buying the stock outright for whatever price it is, and whatever happens in those milliseconds you’re confirming the trade means the price could be slightly different than you expect. When you make a limit buy, you enter the bid or the price you want to pay, and the transaction doesn’t go through unless the stock hits that price. Same thing when you sell--you can do market or limit.
Stock prices rise and fall because people are entering into these two types of trades at the same time. Very basically, when people are buying stock more than selling, then the price of that stock is going up, and when people are selling more than buying, then the price will generally go down. Now, when someone does a market buy, then someone who’s initiated a limit sell will transfer over their shares. Market buys trigger limit sells at the highest offer first. So if I’m doing a market buy for a stock that’s currently priced at $50, someone who has their limit sell scheduled for $50 is going to send me their share and get my money. When you buy high, that tells the market that people want the stock and they’re willing to pay for it, so the current price is validated and the stock price increases.
Where things get complicated, and I’ll argue this until the day I die, but economics is more about psychology than it is about math. People buy or sell stocks because they hear things about the company that issues that stock. If things are good, then you want to buy in and benefit. If your name is Elon and you designed a sheet metal dumpster that tells you it’s a truck and sets fire to itself now and again, then your company’s stock is going to go down because people are going to sell it.
It kind of is all about vibes. You get a bit of information about a company, as the Motley Fool says, and you’re likely to trade based on that information. Unfortunately, and this is the reason that the Motley Fool’s characterization of market forces as information is wrong, is that people aren’t rational creatures, and even if you are, you can’t count on someone else to be. People are going to react differently to the same information you are.
To complicate things even further, there are individual oligarchs and whole organizations that are looking to capitalize on your feelings and make as much money as they possibly can on their own trades, so they’re looking to predict what you’re going to do, and their actions will heavily influence the market one way or another because they likely own a lot of shares. In fact, the richest one percent of Americans hold half of all stocks, and the richest ten percent own around ninety percent of the entire market.
And institutional traders and rich dudes have cutting-edge edge expensive technology that allows them to engage in algorithmic trading. This means computer systems and software that allow for transactions to occur in microseconds, beating out any hopes of you or I ever starring in a reenactment of Glengarry Glen Ross.
This also happens through a process called arbitrage. This happens when a stock price on one exchange is different than the price on a different exchange. Say the price is a hundred bucks a share on the New York Stock Exchange and it’s a hundred and two on the Tokyo Stock Exchange. Well, rich people software is going to jump on that immediately and buy stock at the lower price on the New York exchange to sell it for more on the Tokyo exchange. So another factor that affects the rise and fall of stock prices: rich people games.
Most regular people are not doing any of that. Of the tiny percentage of stocks owned by U.S. households, over half of it is tied up in retirement plans. The owners of those retirement accounts are not individually managing those trades.
So, the bottom line about the bottom line is that the rise and fall of stock prices generally relates to a couple of key things. One is kind of about what someone is willing to pay for something versus what someone else wants to sell it for. Both parties in the transaction believe that they’re getting a good deal, otherwise there wouldn’t be a deal at all. Some of it is also big moves within the market by institutions and individuals who own a large amount of stock. The more you own, the more waves you can make. And another large amount really does come down to vibes. It’s just how you feel about a company, or the CEO and the stupid fake truck he just made that looks like it was assembled from the original Playstation’s polygynal graphics engine. Or maybe you think you know something about a company that makes you want to trade a certain way. Fun reminder that if you definitely know something about a company and you trade on that information, that’s called insider trading and it’s illegal for everybody except Congress. It’s what Martha Stewart went to jail for, and that brings us full circle back to pies, and I’m going to go have dessert.
Please like and subscribe and check out my other videos on big issues and historical disasters, and if you want to inspire the next dumb question Thursday then give me some ideas down in the comments. You can find the sources for this episode along with links to my website, merch, and Patreon down in the digeridoodles. Let’s do some f*cking good together wherever we personally can in the world, and I’ll see you in the next one.
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