Let’s dive a little bit deeper into what supply and demand is, and what the genuine driving forces of trends are.
The stock market is a continuous auction
If you’ve ever seen an auction in real life or on television, you already have a pretty good understanding of what the stock market is in principle. It’s a forum where various people meet, for reasons of their own, to buy and sell stock of thousands of different companies, auctioned off in parallel. The more sought-after shares of a company are, the quicker people will outbid each other for them, eager to acquire something rising in price. The fewer people perceive its value, the louder the silence among the bidding audience will be, and slowly the auctioning master will start dropping the price to make a sale.
How does this relate to trends? Well, trends in the stock market resemble continuous bidding up or down of prices that persists for a meaningful duration of time. An bidding for a meaningful amount of time can only be happening if there is a large amount of money bidding for it. I consciously did not write “amount of people” bidding, but “amount of money”.
Only the big money can truly change price
In a real-life auction, usually a single unique item is sold – in the stock market, shares are sold in bulk, and buyers and sellers work in parallel. That means, a few people here and there buying little quantities for their personal use won’t move the needle of the stock price. Only large buyers commanding a large amount of capital can buy in bulk and generate enough demand to drive prices up.
What moves price is not the amount of people bidding, but rather the amount of money that is participating in the bidding. Buyers will slowly, and sometimes rapidly, outbid each other to acquire stock.
Big buyers acting in unison cause trends
Thinking back, there are hundreds of ways to skin the cat in the market – hundreds of strategies employed to profit, strategies that often oppose each other. But they aren’t relevant – what drives prices up/down is neither opinions, nor strategies, and also not the amount of people acting in the market. It is the net sum of money behind buying demand versus selling pressure. Net more selling than buying, price goes down – net more buying (demand) than selling (supply), price goes up.
And the large buyers that control the vast majority of capital in the market command the lion share of this price change.
Even more so, if this bidding is caused by many such large buyers in parallel, that between them control massive funds and who have their eyes set on the same stock(s), they will not all be able to buy at the same time in bulk without causing exponential price spikes. This would hurt them, so as a result, they are forced to stretch their buying out over time. This massive buying demand, by groups of large buyers, stretched out over time, causes price changes that persist over a meaningful duration of time.
This is where trends are formed. Trends resemble persistent imbalances of demand and supply. For example, in an uptrend, 1) buying demand outpaces supply, and 2) does so over an extended duration because the large buying demand cannot be satisfied within one or two small orders but needs to be slowly served over weeks, months or longer. The opposite occurs during a downtrend, with large sellers’ selling outpacing demand over a longer time-frame.
The players that really make or break the trends and the market are those that have almost unlimited capital at their fingertips, able and willing to buy tens or hundreds of millions of shares or more. If they start a campaign to enter a stock, they are willing to put hundreds of millions to billions of dollars into a position, something that takes time to pull through – weeks, months, or years.
If many large buyers frantically fall over and try to outbid each other over time in a single stock, massive prolonged demand outpaces supply and drives prices up for a while, leading to months and year-long trends.
These large buyers are collectively referred to as the big money, or institutional money. We will get into the reasons they buy a stock later. First, the next guide will help understand just how big these money interests are and what outsized effects they have on price evolution.
