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The "whys" of stock price moves

Hand Bells C#5-C6


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We could kick off a new line of thought by asking a qualitative question: why did the stock price of XYZ Inc. fall yesterday?

When we ask a “why” question of that sort, we are making a presumption: that facts in the world – in this case, facts in a peculiar but well-defined social institution – have causes, and these causes are susceptible to rational explanation.

In this case, we might say (recalling what a high school teacher told us about economics) that the value of XYZ shares fell in order to preserve the equality of supply and demand. But that doesn’t really get us far.

The supply of stocks is relatively inelastic. New issuances of stock, especially new issuances of those stocks listed in any of the leading indexes, are rare events, and we can leave them aside for now.  Let us take it as a given that a constant amount of  XYZ continues to circulate. Then we’ll be especially interested in demand.

What does it mean to say that a fall in demand caused a fall in the stock price? It just means that yesterday, some would-be sellers offered their XYZ stocks for sale on the market at the listing price as of the morning bell, and couldn’t find any buyers. If they had found buyers at that price, they would have sold at that price. But they didn’t so they had to lower their price in order to excite interest and make their sale.

But surely some of you will think this “supply and demand” stuff a shuffling evasion, a game with words.  You have a point: To say that buyers were no longer found at the old price is, in truth, only to restate the problem. This was a change. On earlier days, buyers had been found at that price. So … what produced the change? What depressed demand?

Here we get into the domain of a thousand television pundits. If the price had risen Tuesday, and then again Wednesday, then the pundits explain Wednesday’s move as “continued momentum.” If it rose Tuesday and fell Wednesday, they say: “profit taking.” If it fell both days … momentum again. If it fell Tuesday and rose Wednesday: “bargain hunting.”

All possibilities are thus covered!
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