Every single second the values of public companies are changing. Through the intraday forces of supply and demand, stock prices fall and rise, affecting the overall worth of corporations. When there is an influx of buyers, demand rises, and so does price. When there is an influx of sellers, demand falls and so do prices.
A very common misconception is that prices fluctuate in the stock market due to regular people like you and me who decide to either buy or sell stock in a company. Let’s take a look at why this cannot be true.
For this example I’m going to use trading data from the stock AAPL (Apple Inc). Every single day around 90 million shares of Apple are traded. If we multiply this by the stock price-(127.39)-we get a trading volume of about 11 billion dollars. This means that every day, 11 billion dollars of stock is being traded. It starts to make sense as to why regular people, or “retail investors” don’t have the power or finances to move prices. Instead most volume is traded by large banks and institutions, through algorithms and automated robots.
Almost 70 percent of all shares are traded through automated algorithms that execute transactions in a matter of seconds. Have you ever wondered why stocks move almost instantaneously when major news stories are released? In the background trading robots use natural language processing to understand the news stories and make transactions based on them.
A couple weeks ago, President Biden announced a plan to raise capital gains tax for wealthy Americans. Lets see how the market reacted.
Each of those rectangular candles represent one minute. You’ll notice the price action before the news event was very minimal. Immediately after the news was released, in 2 minutes, 800k shares of AAPL were traded.
The process went a little bit like this: as soon as major news sources started publishing the story, robots working for institutions recognized the news was negative for the overall market, and sold shares.
The markets move because of sentiment and mostly algorithms. This is why you can’t make money when you hear good news about a company. Algorithms are faster and more efficient. By the time you open your brokerage app to buy shares, the price will have already jumped, and you’ll be too late.
This is the very basis of what Quantitive traders do, but it gets a lot more complicated.