So when you want to set up investment incomes, the price you pay is set by where the bull and bear forces reach an equilibrium -- that is, where they agree the stock is worth.
If the market price of a stock is $50, that means that's the price where bulls will buy and bears will sell.
In theory, everybody who wants to buy at that price will do. And everybody who wants to sell at that price will do so.
Yet That Balance or Equilibrium Constant Fluctuates
But that changes constantly.
Stock prices constantly fluctuate while the exchanges are open. They go up, down, all around.
Partly it's because some buying and selling is not done because of the stock prices.
For example, many investors continue to buy shares in stock index funds through payroll deductions. Therefore, no matter what these investors may think about the market or individual companies in the market, their money goes to buy shares in every company in that index.
If some people withdraw from a mutual fund -- it could simply be because they want to use the money for a vacation -- they force the mutual fund to sell some of its holdings to pay off the redemptions. No matter what the fund manager thinks of the company.
So a certain amount of every day's buying and selling is done by necessity, without regard to any specific market opinion.
Market Prices Adjust to Where They Have to Be
If a stock's price goes down below where other market participants think it "should" be, they'll buy it, believing they're getting a bargain.
This buying will raise the stock's price. When it's gone up to a point where these market participants believe it's fairly valued, they'll stop buying because it's no longer a bargain.
If a stock's price goes up above where other market participants think it "should" be, they'll sell it, believing they're getting a good price.
This selling will lower the stock's market price. When it's gone down to a point where these market participants believe it's fairly valued, they'll stop selling because they're no longer getting more money than it's worth.
Therefore, this constant buying and selling keeps the stock's price in equilibrium between the bulls and bears, the buyers and sellers.
If a stock is priced at $50, that's what it's worth. If the market as a whole believed it was "really" worth $55, then there would be buyers buying and raising it to that point.
If the market as a whole believed it was "really" worth $45, then there would be sellers selling and lowering it to that point.
That's why financial academics believe in the "efficient market hypothesis" -- because a stock is priced at the point where all the bulls and bears agree.
There is no way to determine who is "right" -- but the current price is where both sides agree a stock is worth.
This would be easier to perceive if the market price of a stock would remain fixed for longer periods of time. Because we see it constantly bounce up and down, we don't understand that each price point was the right price -- at that time, even if that time was only for one minute.
That's why I put in market orders when I buy financial securities for my investment incomes. Trying to guess whether I can get it at a lower price is a waste of time.
Author Resource:
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