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More Sellers than Buyers?

Submitted by Larry Frank Sr. on Tue, 11/27/2012 - 3:00pm

Sometimes, when financial markets are spooked by uncertainty over the
fiscal cliff, regulations or Europe, you hear people say that there are more
sellers than buyers. This is an expression with little basis in fact. Let’s bust
this myth.

                                           Think about it. Each sale requires both
                                           a seller and a buyer. You cannot
                                           sell financial assets to air or space.
                                           There is someone on each end of deal
                                           all the time that sets the going price.

                                           It is important to understand this very
                                           simple principle, but since nowadays,
                                           you can’t see the other party, and it is
                                           easy to forget that they are there. Even
                                           the stock traders and brokers who
                                           used to be on the floor of the
                                           exchanges are going away, replaced
                                           by computers and high-frequency
The floor, circa 1955
                                           trading algorithms.

                                           Today’s deals are done electronically
                                           and impersonally rather than over a
                                           handshake or face to face like the old
                                           days. Look at these pictures of the
                                           New York Stock Exchange trading
                                           floor. The biggest change over the past
                                           half-century is that the number of
                                           people trading keeps decreasing.
                                           .
                                           It is easy to forget the human element
                                           these days. So it’s easy to forget that
                                           every time you buy or sell a stock,
circa 1986                                 someone is on the other end of the
                                           deal. We tend to forget the duality
                                           of transactions when not only our
                                           business dealings. But even our social
                                           interactions go through electronics.
When the markets are selling off, it
                                         doesn’t mean that there are more
                                         sellers than buyers, but that there are
                                         more sellers willing to sell at a lower
                                         price than buyers willing to buy at a
                                         higher price.

                                         This means the buyer will not accept a
                                         higher price that the seller wishes they
                                         could get. The seller has to keep
                                         lowering his or her price until someone
                                         buys. We don’t see this because we
2005                                     don’t see the bid price and the ask
                                         price, both of which are still part of
                                         selling and buying through exchanges.
                                         What is actually happening is easy to
                                         forget when you sit in front of a
                                         computer entering numbers without
                                         realizing what goes on behind the
                                         scenes between those two parties.

                                         Financial transactions really are a zero
                                         sum game. Naturally, the seller always
                                         wants a high price and the buyer
                                         always wants a low price. So
2011                                     expectations about the future are what
                                         moves prices up or down.

Whenever you buy a security, you hope that its price rises, and the seller
thinks the price is going down. Both are hoping that the other party is
wrong.

We call this the greater fool theory. Whether you are buying or selling,
you hope that there is a greater fool out there who will lose out while you
profit.

Follow AdviceIQ on Twitter at @adviceiq.

Larry R Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial
Planning. www.blog.BetterFinancialEducation.com.

AdviceIQ delivers quality personal finance articles by both financial
advisors and AdviceIQ editors. It ranks advisors in your area by
specialty. For instance, the rankings this week measure the number of
clients whose income is between $250,000 and $500,000 with that
advisor. AdviceIQ also vets ranked advisors so only those with pristine
regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012,
by veteran Wall Street executives, editors and technologists. Right now,
investors may see many advisor rankings, although in some areas only a
few are ranked. Check back often as thousands of advisors are
undergoing AdviceIQ screening. New advisors appear in rankings daily.
Topic:
Investing
Stocks
Asset Allocation

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Advice iq more sellers than buyers

  • 1. More Sellers than Buyers? Submitted by Larry Frank Sr. on Tue, 11/27/2012 - 3:00pm Sometimes, when financial markets are spooked by uncertainty over the fiscal cliff, regulations or Europe, you hear people say that there are more sellers than buyers. This is an expression with little basis in fact. Let’s bust this myth. Think about it. Each sale requires both a seller and a buyer. You cannot sell financial assets to air or space. There is someone on each end of deal all the time that sets the going price. It is important to understand this very simple principle, but since nowadays, you can’t see the other party, and it is easy to forget that they are there. Even the stock traders and brokers who used to be on the floor of the exchanges are going away, replaced by computers and high-frequency The floor, circa 1955 trading algorithms. Today’s deals are done electronically and impersonally rather than over a handshake or face to face like the old days. Look at these pictures of the New York Stock Exchange trading floor. The biggest change over the past half-century is that the number of people trading keeps decreasing. . It is easy to forget the human element these days. So it’s easy to forget that every time you buy or sell a stock, circa 1986 someone is on the other end of the deal. We tend to forget the duality of transactions when not only our business dealings. But even our social interactions go through electronics.
  • 2. When the markets are selling off, it doesn’t mean that there are more sellers than buyers, but that there are more sellers willing to sell at a lower price than buyers willing to buy at a higher price. This means the buyer will not accept a higher price that the seller wishes they could get. The seller has to keep lowering his or her price until someone buys. We don’t see this because we 2005 don’t see the bid price and the ask price, both of which are still part of selling and buying through exchanges. What is actually happening is easy to forget when you sit in front of a computer entering numbers without realizing what goes on behind the scenes between those two parties. Financial transactions really are a zero sum game. Naturally, the seller always wants a high price and the buyer always wants a low price. So 2011 expectations about the future are what moves prices up or down. Whenever you buy a security, you hope that its price rises, and the seller thinks the price is going down. Both are hoping that the other party is wrong. We call this the greater fool theory. Whether you are buying or selling, you hope that there is a greater fool out there who will lose out while you profit. Follow AdviceIQ on Twitter at @adviceiq. Larry R Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning. www.blog.BetterFinancialEducation.com. AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients whose income is between $250,000 and $500,000 with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.