Supply and demand in stocks?

I can see how the forces of supply and demand can lead to support and resistance in price for commodities (oil, etc.) and also FX (exchange of inter country goods) but how does support and resistance form in stocks - surely the supply and demand factor doesn't exist to the same extent?

This is really a question of technical analysis. I know the support and resistance levels for an index and see how they work but what really exists for someone to say a stock is too expensive at this level if they weren't looking at a chart? The average investor or fund manager cares little whether a stock is 95p or 93p if he wants to buy it.
A follow on question from that is therefore, if everyone is using technical analysis, then TA can be exploited by the big companies to go the other way. Day trading seems to be entirely run by technical analysts.

Supply and demand is purely the interest in selling and buying respectively and as such is the same in all markets. As for exploiting the use of technical analysis, it is most definitely done, just as is the exploitation of the use of fundamental analysis.

Supply and demand for the shares influence the price of those shares: the only way a share price can rise is if people buy all available stock at 93p, So they have to bid 94p to get some more. The converse holds for share prices to fall.

Share prices usually have little to do with supply and demand for the company's products or services - at least in so far as this would assist traders or investors on a consistent or frequent basis.

Share prices are complicated by the fact that they are treated as commodities in some respects - people who want exposure to rising oil prices often buy oil firms' shares rather than oil futures - and also by the influence of their parent indices - if major companies in oil, pharma and telecoms in the FTSE100 fall and take the index down with them, probably the supermarkets in the index are going to fall too.

Nevertheless, s/r levels apply to stocks every bit as they do in other areas of TA.

What makes everyone want the stock at 93 and not say 85 or 100?
Suppose we had no charts, would all those same people be buying at 93?
The average investor hardly cares what the price is, they just buy. So, the people demanding a particular price of 93 must not be the average investor so either 93 has some relevance for them.
Also, what makes some buy at 93 and then others buy at 93 again, the same buyers?

Price in some ways is pretty irrelevant to traders, in the sense of value. They're just numbers. It is trend that is important, where we are going tomorrow, not where we are today.

The way I read it, the way old-time traders (read speculators in those pre-chart days) worked was that they carried mental charts anyway. They targeted a share they wished to buy and started tape-watching. If they saw it run up steadily this week from 85, where it had been for 6 months, to 86 to 87, then 88, 89, 90, 91, 92 and now 93, they would buy if it dipped back to 92 or 91. Having done that, 100 is a good place to get out with a near 10% profit: its also a century number and many buyers from 85, 86 etc. must have thought, 'Durrrrh, if it gets to 100, I'll sell'.

But if it dropped all the way to 85, the speculators would probably sit on the sidelines - the chances of a strong trend continuing are good, but the chances of an impressive trend repeating are nothing like so good.

Of course, having got out at 100, they might have seen price drop again to 93: that level might attract new buyers who missed the first run and would not be a bad level for those who rode the momentum of the trend to buy the same share again.

This all sounds very rational to me, but life is complicated by the irrational decisions of others - e.g. this company made a lot of profit last year so the shares must be worth owning: these shares paid a good dividend and I'd like a reliable income: this company owns a lot of shops and people always like to buy things: and worst of all, this company is massive and too big to fail and so the shares must be risk-free. Yes, these people don't care if price is 93 or 83 or 103, they are more concerned with how many thousand £'s they can put into the total purchase.

People do tend to think that buying shares is a good way to invest in a well-managed profitable company. I think buying shares is just a good way to invest in shares; if you really want to profit from a strong company, the best way to do this is to take a job with them and take home the salary and bonus.

tomorton said:

Supply and demand for the shares influence the price of those shares: the only way a share price can rise is if people buy all available stock at 93p, So they have to bid 94p to get some more. The converse holds for share prices to fall.

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Something a lot of folks don't understand is that prices actually tend to move most aggressively in the absence of available opposing orders. For example, all it takes for prices to fall very quickly is for prospective buyers to pull their bids.

SanMiguel said:

What makes everyone want the stock at 93 and not say 85 or 100?
Suppose we had no charts, would all those same people be buying at 93?
The average investor hardly cares what the price is, they just buy. So, the people demanding a particular price of 93 must not be the average investor so either 93 has some relevance for them.
Also, what makes some buy at 93 and then others buy at 93 again, the same buyers?

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Don't forget that technical analysis is not the only driver of stock purchases and sales. There's fundamentals as well. If a fundamental trader figures XYZ is worth $100 then he is going to tend to want to buy at a price below that which offers them a perceived good return. Even within a TA view you have to also account for the fact that folks operate with various time frames and strategy approaches.

Rhody Trader said:

Something a lot of folks don't understand is that prices actually tend to move most aggressively in the absence of available opposing orders. For example, all it takes for prices to fall very quickly is for prospective buyers to pull their bids.

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I haven't seen it but I can believe it must be true - if there's no buyer at an auction, the auctioneer always drops the price.Its a long time since I watched level 2 but it is a little surprising to see orders, bids and offers changing but no transactions seem to be completing.

Rhody Trader said:

Don't forget that technical analysis is not the only driver of stock purchases and sales. There's fundamentals as well. If a fundamental trader figures XYZ is worth $100 then he is going to tend to want to buy at a price below that which offers them a perceived good return. Even within a TA view you have to also account for the fact that folks operate with various time frames and strategy approaches.

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Not sure about that one in practice John. Fundamentalists can find 100 ways of valuing a share: every broker out there has a different buy target and price objective for any share, every fund manager the same I suppose. Hard to think there's enough consensus to move the price at a predictable level.

Rhody Trader said:

Don't forget that technical analysis is not the only driver of stock purchases and sales. There's fundamentals as well. If a fundamental trader figures XYZ is worth $100 then he is going to tend to want to buy at a price below that which offers them a perceived good return. Even within a TA view you have to also account for the fact that folks operate with various time frames and strategy approaches.

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The more people doing one thing or following the TA, you'd think the less you want to do it.
For example, everyone knows the support is at 90, in theory that should just be ripe for the taking of people's money by the institutions but I guess the fact there are buyers there means that the price cannot get pushed down too much? I suppose the institutions would be buying there as well hence the support?

FA don;t tend to buy day in day out though, so when you see an index bounce off support, it can;t be the same FA traders buying again...well it could be but I class that support as intraday trading.

SanMiguel said:

For example, everyone knows the support is at 90, in theory that should just be ripe for the taking of people's money by the institutions but I guess the fact there are buyers there means that the price cannot get pushed down too much? I suppose the institutions would be buying there as well hence the support?

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You've no doubt heard of stop running, which is basically institutions looking to profit by triggering standing orders at key S/R resistance levels.

Rhody Trader said:

Don't forget that technical analysis is not the only driver of stock purchases and sales. There's fundamentals as well. If a fundamental trader figures XYZ is worth $100 then he is going to tend to want to buy at a price below that which offers them a perceived good return. Even within a TA view you have to also account for the fact that folks operate with various time frames and strategy approaches.

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Rhody Trader said:

You've no doubt heard of stop running, which is basically institutions looking to profit by triggering standing orders at key S/R resistance levels.

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Sure, which is why price usually pushes past an obvious level and then bounces but why the bounce - because all the stops are being hit? You'd think if stops were hit it would push through even further.

For example, many buyers went long at 90. After price moves in their direction a reasonable amount, they move all their stops to break even.
The next trading day, price returns to 90 and the institutions drive the price to 89.5 to hit the stops. The stops are sell orders so why does the price then bounce upwards from the support?

Once the sells are filled, we would possibly see consolidation around 89.5, not a V-shaped single bottom, but the trader who has been throughout or who is now in cash would probably see the pattern as a pull-back of some description in a good uptrend and try to get in long.

Good question.

First thing you need to realize is that physical commodities, futures and stocks all have different supply and demand profiles.

With physical commodities you can only buy what actually exists (fraud aside). You can't buy oil that doesn't exist any more than you can buy a toaster that doesn't exist. Of course, we don't trade physical commodities in our spheres but we do trade commodity futures in which case the amount of contracts traded is not in any way limited by the amount of the underlying physical commodity available.

The number of contracts traded is limited by the matching of buyers and sellers. If you want to buy a contract and there is no-one willing to sell you a contract, then in the futures markets, you wont be getting filled.If you want to buy, the supply side is someone that is willing to sell. The seller may be someone that brought a contract at a lower price or it may be someone that is not currently in the market. In the first case, no new contract is created in the second case, a new contract comes into existense. So we have 2 things to consider - the total amount of open contracts (open interest) and the availability of a buyer/seller to take the other side of the trade you want to place.In my opinion, the number of contracts available is not really part of the 'supply' dynamic per se as new contracts can be created as long as a buyer and seller agree. Saying that - extremes of the number of contracts on the high or low side could be indicative of something being afoot. Whilst there is a supply of open contracts, on most days it's not going to be a major force in the price move.

With stocks, it's a different dynamic. Like futures, we have both the dynamic of buyer/seller availability as well as the number of shares which is similar to open interest/number of contracts. Unlike futures, the number of shares available to be traded (float) is a critical part of the equation. With stocks, there is a finite supply of shares. When a company does an IPO, you may be suprised that they often release a very small percentage of the total shares created to be traded on the exchange. They keep a lot for themselves, their underwriters, that chick in the massage parlour etc.

There is also the fact that institutions buy and hold large percentages of the available shares which means they are not available to be traded every day. 95% institutional ownership of an S&P500 company is not at all uncommon. So - we end up with a limited supply of shares available to be traded at times. The process of accumulation is intended to take advantage of this. By quietly buying up shares, the supply of available shares becomes low and this has the effect of causing the price to rise. Simple supply and demand.

The availability of shares is just one side of the equation. There is another side and that is the availability of buyers/sellers at any specific price level. Stocks are different in that we have market makers/specialists who act as buyers/sellers of last resort. In normal circumstances, it is their job to take the other side of the trade and so there is almost always a person to trade with. This does have it's limitations so the dynamic is a blend of a regular availability of buyers/sellers with a sort of insurance policy buyer/seller of last resort who has some guidelines to give you a 'fair' fill but who will jump out of the way if things get too hot.

Forex and Bonds are not my area at all - but I would imagine each has unique characteristics.

Supply and demand dynamics are different with different markets and this will of course have a bearing on the personality of that instrument in my humble opinion.

Rhody Trader said:

Something a lot of folks don't understand is that prices actually tend to move most aggressively in the absence of available opposing orders. For example, all it takes for prices to fall very quickly is for prospective buyers to pull their bids.

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Bingo !

DionysusToast said:

The availability of shares is just one side of the equation. There is another side and that is the availability of buyers/sellers at any specific price level. Stocks are different in that we have market makers/specialists who act as buyers/sellers of last resort. In normal circumstances, it is their job to take the other side of the trade and so there is almost always a person to trade with. This does have it's limitations so the dynamic is a blend of a regular availability of buyers/sellers with a sort of insurance policy buyer/seller of last resort who has some guidelines to give you a 'fair' fill but who will jump out of the way if things get too hot.

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As they did in the recent crash pulling the bids despite being "in charge" of providing liquidity.

I think I was trying to get across the question of why support exists at a particular level.
Without a chart showing support at 93, how or why would the buyers come in at 93 again. The market maker is just there to fill their order and sell to them regardless aren't they?
Assume the institutions stop hunt the 93 level, what would possibly make buyers come in there again if all the stop hunts were SELL orders closing their original longs from 93 at break even.

Actually, that brings me onto a separate question, if everyone wants to sell pushing the market down and the market maker HAS to buy, don't they lose on the transactions or do they underwrite it in the market?

SanMiguel said:

As they did in the recent crash pulling the bids despite being "in charge" of providing liquidity.

I think I was trying to get across the question of why support exists at a particular level.
Without a chart showing support at 93, how or why would the buyers come in at 93 again. The market maker is just there to fill their order and sell to them regardless aren't they?
Assume the institutions stop hunt the 93 level, what would possibly make buyers come in there again if all the stop hunts were SELL orders closing their original longs from 93 at break even.

Actually, that brings me onto a separate question, if everyone wants to sell pushing the market down and the market maker HAS to buy, don't they lose on the transactions or do they underwrite it in the market?

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I think the answer is "it depends". If someone has a large buy order to fill at a price point, then that will effectively act as support. So - in this case, over a relatively short period, the support will be definite and unsurmountable until those orders are filled.

If you consider a longer time frame, and an accumulation scenario. It's a different story. If the supply of stocks on the market has been constrained, then there is absolutely no reason to think there will be enough supply at a point of resistance to stop the up move that occurs as a result of the accumulation.

As for MMs losing money - sometimes they do, sometimes they don't. Overall they come out on top because their very existence on the order book moves the stock. Whenever I'm in a trade and UBSS come along, I know the price is going to shrink away from them. The fact that they are there showing an inclination to sell but are actually buying gives them quite an edge.

For price to make an uptick all the offers have to be consumed by a buyer, so that the next place he can find sellers to buy from is one tick(or however far?) up