Even though we're after establishing investment incomes, the market prices we pay for stock is determined by a sophisticated form of haggling.
The More You Want the Deal, the More You Sacrifice to Make It
The person who is the most emotionally attached to making the deal go through -- the one who has the most to lose if it the transaction is not completed -- will be the loser. They're the ones who will pay more than they want or who will receive less money than they wish.
As small investors, we forget that, because our 100 share or even 1,000 share market orders aren't big enough to affect the stock market. We give our brokers the buy or sell order, look at the current price and think of it as something close to fixed, similar to the price of a loaf of bread, and usually our final price is close.
But behind the scenes buyers and sellers in the stock market are bargaining.
Often, Somebody Has to Give Up the Price They Want
If this buyer wants to pay only $50 per share, but you want to receive $55, there is no deal until one of your decides making the transaction happen is more important than receiving your desired price.
You can read a lot about how stock market share prices are determined by the struggle between the bulls and the bears, and that's just another way of putting it.
Bulls are looking to buy the stock. Bears are looking to sell it.
Stock Opinions Depend on the Current Price
But this is relative. It's possible to be a bull for a stock at $50 per share and a bear for it at $75.
Institutions that buy and sell in large quantities have a difficult problem.
For example, maybe a mutual fund manager owns 100,000 shares of a company, then decides they need to sell it to buy a stock that's a better opportunity.
When you need to sell that much, buyers realize you are in a weak position, and so they'll refuse to give you the price you desire. They'll insist on a cheaper price. The more shares of stock you sell at one time, they more you'll reduce the price you receive for it.
The same when you're an institution trying to buy a large quantity of a company's stock. The more you keep buying, the more you alert sellers of that stock that you need many more shares. The more you have a need, the more the sellers will raise their prices.
So in the end the stock market is just like haggling for mangoes with a sidewalk vendor. The buyers set a bid price. The sellers set an ask price.
When they don't meet, somebody has to go up or down -- sometimes it will be both.
You Must Adapt to the Trend Set by the Majority
When there are more sellers than buyers, the stock's price will go down, because sellers will have to lower their asking prices if they want to find buyers. When it's happening for the majority of stocks, it's a bear market. People who think the prices are too high are more powerful than those who think they're too low.
When there are more buyers than sellers, the stock's price will go up. Because buyers will have to increasing their bid prices to find people willing to sell. That's a bull market.
Trends Change Around When Nobody is Left to Dispute Them
It's said that a bear market bottoms out when the last bull gives up and becomes a bear. At that point, nobody is left to buy, and therefore selling must stop. Prices then go down to a point so low that -- finally -- somebody turns into a bull and buys. Then more start buying, and prices rise.
Similarly, a bull market peaks when the last bear gives up and becomes a bull. At that point, nobody is left to sell, and therefore buying must stop. Prices then go so high that -- finally -- somebody turns into a bear and sells. Then more start selling, and prices go down.
The price you pay for investment incomes will be set by the bargaining power of those who think the current price is too high and those who think it's too low.
Author Resource:
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