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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.
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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.
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