This answer can be illustrated with a very simple example. At first you may
think that it can’t be that obvious, but philosophically, it really is this simple.
It’s just the way that the whole auction process works so well that’s the
Think of a regular auction (i.e. furniture, paintings, lamps, etc.). There may
be 100 items for sale, but say only 10 of them are actually worth anything –
the other 90 are junk. Now assume there are 100 attendees at the auction.
They’re all fairly savvy, and have no intention of buying any of the junk. They
just want the good stuff (1 of the 10 nice things). When the bidding finally
starts on one of the good items, the auction attendees keep bidding higher
and higher, trying to outbid each other. The auctioneer keeps raising the
price, and a few of the buyers drop out. The price keeps inching higher,
until finally one person ends up buying the thing. Why did the price go up?
In a nutshell, there are a limited number of nice things at the auction, the
buyer didn’t want to go away empty-handed, and had to compete for the
item. So far, nothing you didn’t already know, right?
Now, what if there were only 20 buyers at this auction, and there were
actually 100 nice things to be owned (and no junk)? Would the pressure
and competition be as great? Not at all. Each buyer could buy as many nice
things as they reasonably wanted, and odds are, they wouldn’t have to
compete with the other buyers nearly as much. As such, the auctioneer
would not be able to ask much for any one of the items for sale. That would
keep the prices fairly low.
The point here is that there must always be a balance. The number of
buyers and the number of goods or items for sale always leads to a price
that could be considered an equilibrium. Generally speaking, for a stable
stock, for every 100 shares that are being bought there are usually 100
shares being sold. In other words, there is a balance between the buyers
and the sellers. The buyers are able to buy all the shares they want, and
the sellers are able to get rid of all the shares they want to sell – at a similar
But what if there were too many sellers in relation to buyers? Say for every
100 shares that are trying to be bought, there are 300 shares that are ‘for
sale’. The sellers, in this case, are competing for a limited number of
buyers. How do they make their shares more marketable? By lowering the
price. The other sellers see that happen (thanks to the market’s
transparency in the bid/ask systems). These other sellers can do one of
two things. They can either hold out for their desired sell price and risk not
selling at all, or they can lower their price to be competitive with all the other
sellers. Thus, the price of a stock goes down.
Shorting or selling a stock does not necessarily make it go down
noticeably. But if there are an abundance of sellers (or shorters), all of
those folks are competing with each other to get filled on their orders –
because there aren’t enough buyers to buy all the shares ‘for sale’ at the
time (at that price anyway, there may be a lot more willing buyers at lower
prices). To go back to the original example, what would happen if there
were 1000 nice things ‘for sale’, but only 10 buyers? The auctioneer
wouldn’t be able to ask for much at all – if he wanted to actually sell all the
The process may seem more complex than that, but it really isn’t. What’s
complex is the computerization of this giant auction we call a market. All the
buyers and the sellers are electronically attending the auction, and the
exchanges are the auctioneers.
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