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I'm located in India, and am mostly focused on Indian stock markets, but I intend my question to apply generally. I don't think my question is India-specific, so have not tagged it as such.

I've read various descriptions of the mechanism of how the share price changes depending on the number of shares bought or sold, but the descriptions I've read are quite vague, and my understanding of this is still extremely fuzzy.

The behavior I see in practices violate my most basic expectations of how this should work. Specifically, I would expect if the proportion of deliverable shares (share purchase) was less than 50% (1/2) during a day's trading session, the share price would be lower at the end of the trading session. And conversely, if the proportion of deliverable shares was more than 50% (1/2), then the share price would be higher at the end of the trading session. But I see basically no relationship between delivery percentages and what the share price does.

Some of the descriptions I've read suggest that the behavior of the stock price is influenced by how much people are willing to pay for the share. But as far as I know, in practice people just buy and sell based on the prevailing market price. Limit orders do specify a price, but these are often quite far away from actual price, and if they are not triggered, I don't see how they would influence behavior of the stock price.

I see that someone already asked this in Quora, namely

https://www.quora.com/Why-does-a-stock-go-down-despite-having-a-higher-total-bought-quantity-For-example-the-TBQ-in-Tata-Steel-for-1st-Dec-2017-was-3-95-Lakhs-and-TSQ-was-3-45-Lakhs-yet-the-stock-was-down-1-4-around-mid-day?

but the first answer didn't explain anything to me, and the second answer didn't even seem to be addressing the question.

I'd greatly appreciate any clarity on this, including an actual explanation of how the stock price is determined by the buying and selling of shares, assuming such an explanation actually exists. References to detailed discussions would also be appreciated.

NOTE: I just realised that this question was in part based on a misunderstanding of the meaning of delivery percentage/volume. I thought it meant the proportion of shares that were purchased, as opposed to sold. I then realised this made no sense, and in fact delivery just means to the shares that end up with someone else, as opposed to intra-day trades. This is well described here.

I'll leave this question alone as an illustration of the dangers of asking questions about things one does not understand. Also, Bob's answer is a good description of the process of buying and selling of shares, and clearer than most.

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    If you are interested in how stock prices are determined and how liquidity is produced, you can read books on the topic of "market microstructure". – Flux Aug 26 '20 at 16:54
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When buyers take out all of the sellers at the ask price and no new sellers come in at that price, price will move up to the next ask price on the order book. If that process continues, share price will continue to rise. And conversely, price will drop when there is excess selling pressure.

For example, stock XYZ is has a current price of $50.00 x $50.10 with a size of 8x4. That means that one or more people are offering to buy 800 shares at the bid of $50.00 (limit orders) while one or more people are offering to sell 400 shares at $50.10 (ask). Note that some brokers and web sites denote size in round lots while others denote it with total shares (8x4 versus 800x400).

Suppose a buyer takes out the 400 available shares at the ask price of $50.10 (market order) and no new orders come in to sell at $50.10. If the next seller on the order book is at $50.20 for 200 shares then the new quote will become $50.00 x $50.20 with a size of 8x2

On the bid side, suppose that a new buyer for 500 shares now appears, willing to pay 5 cents more. The quote now becomes $50.05 x $50.20 with a size of 5x2

The short answer is: Throughout the day, if a similar amount of buying and selling volume comes in at current price, there is equilibrium and price goes nowhere. If an excess of one comes in and it takes out the depth of the orders on the order book, price changes.

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  • Thank you very much for the quick reply. I'm currently trying to wrap my head around it. For the moment, I have a question. You write: "while one or more buyers are offering to sell 400 shares at $50.10 (ask)". Did you mean buyers instead of sellers, and if you meant buyers, were you implying that some of the sellers buying at 50.00 would be willing to sell at 50.10? Though I don't see how that would fit in here. Please excuse if this is a foolish question. – Faheem Mitha Aug 26 '20 at 11:28
  • No need to apologize for asking about what you don't understand. I indeed did make an error. LOL. Buyers don't offer to sell when buying. Thanks for catching my typo. In the US we have NBBO. In the $50.00 x $50.10 example, $50.00 is currently the highest amount that traders on the order book are willing to pay for the stock and $50.10 is the lowest amount that they are willing to sell for. Anyone who is willing to pay 10 cents more to buy or accept 10 cents less for selling can have an immediate execution. – Bob Baerker Aug 26 '20 at 12:37
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But as far as I know, in practice people just buy and sell based on the prevailing market price.

That is simply completely wrong, indeed, meaningless.

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  • I've frequently seen the term "buying and selling at market price" used. And anyone selling or buying a stock may indeed choose to buy and sell at the prevailing rate. Since neither they, nor probably anyone else has any idea where the stock price will go next. Of course, I've never actually traded on an exchange (I've occasionally used a broker, who isn't very good at following directions). So perhaps one always needs to place a limit order? But I still don't see why it would be meaningless - it could just be shorthand for placing a limit order at the current prevailing rate, or similar. – Faheem Mitha Aug 26 '20 at 12:50
  • Faheem, the phrase "prevailing market price" is meaningless: it's a "general descriptive phrase". For example, say I said to you "I'm finding it hard to sell my car", or if I said "there's lots of activity in the gold makret today". It's strictly a "general descriptrive phrase." There is no "prevailing" price, it's meaningless. Say you own 1x share of APPL and you wish to sell it using your stock broker. There is no mechanism whatsoever for you to say "I want to sell at the prevailing market price" (because there is no "prevailing" price, it's a meaningless completely general word...) – Fattie Aug 26 '20 at 13:27
  • So, you own 1x share of APPL and you wish to sell it. There are two, and only two, possible ways to sell it. You can say (A) "sell it now to the first bid which is sitting there, regardless of the price" or you can say (B) "put it up for sale at $X and leave it there until someone buys it for $X". There is no other possible mechanism in this spacetime, those are the only two ways you can sell (anything). – Fattie Aug 26 '20 at 13:29
  • You have now mentioned the word "market" which has no connection to "prevailing market price". A "market order" is the usual term used, in english, at brokerages for (A) "sell it now to the first bid which is sitting there, regardless of the price" – Fattie Aug 26 '20 at 13:31
  • The other answer has completely explained how prices move! – Fattie Aug 26 '20 at 13:33

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