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Let's say that a company entered a stock market selling 1000 shares $1K each in total $1M.

What would need to happen in order to double the price of a share? Are both scenarios valid?

1st

Additional $1M entered the market, for example there could be 1000 transactions $2K each:

Stock price: $2K
Market cap: $2M
Volume: $2M
Cash in the market: $2M

2nd

A single $2K transaction is sufficient:

Stock price: $2K (last transaction)
Market cap: $2M
Volume: $2K
Cash in the market: $1,001,000

In 2nd scenario $999,000 would be created out of thin air, which doesn't seem right. But maybe this is how a stock exchange works? So if there is a crash, not necessarily real value is lost?

For example:

Stock: Dave Inc (DAVE)
Date: 21 Jan 2022

There was volume of 3M shares, $10 per share, in total volume of $30M. Stock price increased by 30%. Market cap is $3.5B. That means that $1B was "created" out of $30M? Is that right?

1 Answer 1

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No, they were not created out of thin air.

For the share price to rise (or change) there have to be a seller and a buyer, and the buyer transfers money to the seller at the price agreed in return for the shares. So when the shares go up - there are buyers who buy shares from sellers at a higher price than the sellers paid when acquiring the shares. The buyers transfer the money to the sellers, who then record a gain, which is the price difference.

Similarly, when the price goes down, the sellers record a loss.

The volume is just how many such transactions occurred. The same share may be sold multiple times throughout the day, or in some shares there may be no transactions at all. The shares may change hands without price movements (sellers gets the same money they paid from the new buyer). So volume and market cap(italization) are not directly related.

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    But in case of DAVE stock, at most $30M of cash entered the market, but somehow market cup increased by $1B. That would suggest that second scenario is possible, thus "value out of thin air". From where this additional value in market cap came from?
    – anth
    Commented Jan 24, 2022 at 17:59
  • @anth market capitalization is based on all outstanding shares, not just the ones traded.
    – littleadv
    Commented Jan 24, 2022 at 18:01
  • market cap = number of shares * price. Number of shares hasn't changed, price increased by 30%, thus market cap increased by 30%. If current market cap is $3.5B, it needed to be $2.6B day before, hence it increased by $1B. What I cannot understand is where this $1B came from, clearly not from the cash. Is it some fake/virtual value?
    – anth
    Commented Jan 24, 2022 at 18:33
  • @anth it is a "virtual" value, this money doesn't exist. Market capitalization is a valuation. It means that the total value of all the shares at the current price is, in this case, $3.5B. It doesn't mean anyone actually paid $3.5B, and it is very likely that if someone would come and offer to buy all of the shares at once the actual valuation would differ (as is frequently the case with take-overs).
    – littleadv
    Commented Jan 24, 2022 at 19:09

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