I don't know if it makes sense, I'm just wondering about its logic. For instance, Elon Musk has a huge amount of Tesla shares and right now he is selling his shares like a madman. Does the Tesla stock price get affected? Does it go down or the opposite?
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6It's worth noting that you can post shares for sale at any price you want, putting them up for sale doesn't necessarily negatively affect the stock price unless you (or others) are selling below the current value.– rtaftNov 16, 2021 at 19:36
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1The act of selling shares at market value doesn't affect the price. Having the media disclose that the largest shareholder sold their stake will very likely affect the price.– MonkeyZeusNov 16, 2021 at 20:24
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7@MonkeyZeus Not necessarily correct - because if there are 10 people each offering 100 shares for $50 each, and you buy $6k of shares, then the first 100 shares are bought for $50 each, and then the next shares would be bought for $50.30, or whatever the next highest offer price was. For small orders on liquid stocks, impact is non-existent. For massive orders, impact can happen.– Grade 'Eh' BaconNov 16, 2021 at 20:27
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@MonkeyZeus also not correct. In fact, not disclosing the sale publicly would cause even more negative pressure on the share price. Why? Unless you happen to know a few individuals who happen to want to buy at the price you're selling and you can legally sell your shares w/o notice, you will necessarily need to sell your shares on the open market. And anyone interested will see this. And within minutes, everyone will know there's a massive unknown selloff of shares which will precipitate a panic as everyone else attempts to also get ahead of what's happening.– iheanyiNov 17, 2021 at 22:53
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How is that not a classic text-book case? Other than fees, what stops you following the price on the WWW?– Robbie GoodwinNov 19, 2021 at 22:53
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5 Answers
I'm not sure I would classify Musk's recent TSLA share transactions as "selling like a madman".
For one thing his holdings are extensive and he's sold, so far at least, only a small percentage. On 11/15/2021 he sold a bit over 2M shares but if you read the disclosure filed with the SEC, he sold those shares out of a block he purchased the same day. The purchased shares were an options grant that he exercised which is the primary way he is compensated at Tesla.
So the net change for Musk's holding of TSLA was zero since he bought 2M shares and sold 2M shares the same day. But according to the disclosure he still directly owns more than 21M shares of TSLA. So this is far from selling "all his shares".
Also of note is the fact that TSLA is generally one of the market's most active stocks and its average trading volume is over 29M shares/day. So while Musk's transactions are large they are under 10% of the company's usual daily volume.
But directly answering your question, the answer is "maybe". If a major shareholder and/or founder liquidates their entire position in their company it would have two main effects:
Depending on the size of the holding compared to the outstanding shares of the company it may "flood" the market with shares and drive the price down.
Secondly and perhaps more importantly, it might cause other investors to lose confidence in the company and its stock and trigger them to sell also. This might further erode the stock price and even lead to a price collapse. While this is certainly not a given many investors, myself included, look at insider holdings as an indicator of their confidence in their own company. If a Chairman or a CEO liquidates 100% of their holdings it might be a "red flag" to some investors. How such actions are interpreted depends on a lot of things in addition to the actual transactions so there is no "100% rule" that says if an insider dumps stock is always bad.
Generally, however, such transactions are strictly regulated by the SEC so that people who are considered "insiders", like Musk, are not able to disrupt the market for their company's stock. Musk, as well, doesn't want to see TSLA stock tank since he's heavily invested in it.
Here's is a link to one of Musk's filings that shows the details of one of his recent "madman" transactions:
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21Small quibble - you state that because the shares sold were purchased 'the same day' as a result of exercising options, Musk's holdings remained the same. This is true, but slightly sidesteps the point - excercising the options increased the total available shares in TSLA by the same amount [because exercising the options effectively creates the new shares directly, they aren't pulled from pre-existing shareholders in the market]. This means that after those exercised shares are sold, there is slightly more net 'supply' of shares in the market, thereby having the potential to drop price. Nov 16, 2021 at 15:15
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3"Just issuing new shares has the effect of diluting existing shares and that's not popular with other shareholders." That may be so, but that's typically how it works - and it avoids the cash outlay of direct compensation, while attempting to tie individual performance more directly to company-wide performance [whether this is effective at long-term corporate success is an open question]. Whether those granted options are released from corporate treasury previously bought-back, or minted new, the point is that the day after exercise + sale has more available shares than the day before. Nov 16, 2021 at 16:24
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4You can put it in context for why this matters, as well - Musk has about 22M in share options able to be exercised. With current TSLA price of $1k, if the company did not release new shares / Treasury shares previously bought, then Musk exercising all his options would cost the company about $20B [I don't know the average exercise price of his options, but given the sharp increase in share price the last couple years I assume it's close to the full current $1k price for simplicity]. Given TSLA has only $19B in cash, that would completely wipe them out and require immediate external financing. Nov 16, 2021 at 16:28
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4@Aganju Yes, it usually does mean that. Here's a rundown: vestd.com/blog/how-to-create-and-use-an-option-pool Nov 16, 2021 at 20:41
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13There's an even bigger point in the SEC filing: Musk has a 10B5-1 trading plan in place. He has already committed to making these sales, beforehand at the start of 2021, of these amounts at these times. This is specifically to prevent allegations of insider trading. The filing also says, right there in the notes, this amount is intended to pay off Musk's withholding taxes for the shares exercised, and he ended up with 1.3M shares that he newly owns. Nov 17, 2021 at 8:09
A major investor selling their shares will significantly increase supply for the stock while demand probably stays the same. The price would decrease.
Obviously a major investor will not just throw shares worth billions on the market but rather use tools like an iceberg order or direct trading with other investors
Maybe a little beyond what you are asking here but one of the repeated misconceptions that you might have seen is the idea that for the price of a stock to drop, a lot of it needs to be sold. For example, people with a HODL mentality seem to believe that as long as they (as a group/team) don't sell, the price of what they HODL cannot go to zero. It doesn't really work that way in reality.
One thing that you can know for sure is that for every sale, there is also a purchase. If Musk sells a lot of stock and if there are enough buyers willing to pay the current price (or more) the price can remain the same or even go up despite the selling.
That doesn't mean there isn't a relationship between selling and price. The reason a lot of selling can cause prices to drop is because not all buyers are willing to pay the same price. For example. Let's say you have 1000 pieces of candy. You have a friend Sam who will pay you 5 cents a piece. You want to sell all your candy. Sam buys 200 pieces and then is out of money. So you go to Mary and she will give you 4 cents a piece. So you sell her 500 pieces. You still have 300 pieces so you go to George. George doesn't like candy much but thinks he can resell it to someone else. He only gives you 1 cent a piece. It works the same way for stock except that instead of 3 people buying from just you, there are thousands of buyers and sellers.
Say Musk sells so much Tesla stock that he exhausts all the demand at the current price. If he wants to continue selling, he must take a lower price. The other thing that comes into play here is that Musk not only knows a lot about Tesla, he has a lot of control over it. If he starts selling 'like a madman' many/most investors will see that as a bad sign for the company. There are laws, though, against 'insiders' selling or buying large amounts without warning.
In some cases, there can be a situation where really bad news comes for a company and the people that were formerly willing to buy at $1000 might now only be willing to buy at $100 now. Or maybe they aren't willing to buy at any price. If no one is willing to buy at any price, the item on sale is considered worthless or effectively priced at zero. Back to our analogy with candy. Sam might be willing to buy at 5 cents normally but what if he finds out your cat peed on the candy? He no longer is willing to buy it at all and neither are Mary or George. Your candy now is deemed worthless even though none of it was sold.
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1You might also mention the order book - that's how, in real life, Sam, Mary and George define what price they are willing to pay. Also, that best price sell and buy orders are matched via the order book. Nov 17, 2021 at 7:03
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3AFAIK that's just a reverse acronym - the term originated from a simple typo ("I AM HODLING") on some forum. @quid– AnoENov 18, 2021 at 12:13
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Sure, I remember seeing "Hold On for Dear Life" back around 2016 on crypto boards. I'm sure it started as a typo as you say, but certainly came to have a specific meaning.– quidNov 18, 2021 at 21:55
The simplest explanation I can think of is to answer an analogous question:
Question: "If I fart indoors, does the room get warmer?"
Answer: "It depends on if the air conditioning is on. If the air conditioning is on then your fart probably wont make the room ACTUALLY get warmer, but it will cause it to cool down at a slower rate (albeit inperceptively)"
Selling stocks does have a negative effect on price, but whether or not the price ACTUALLY falls depends on all of the other factors affecting the price.
As well as the demand and supply (the primary determinants of price) issue, there's also the fact that large shareholders usually have good knowledge, and often insider knowledge, of the business. Other shareholders (or potential investors) ask themselves, "What do they know that I don't?".
