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From what I understand, stock prices go down when large amounts of the stock are sold (thereby lowering the price to attract buyers), and go up when large amounts are bought (vice versa - buyers rise the price to attract sells).

So why cant I make "free money" by simply selling my stake in a company at any price (thereby lowering the price), then instantly rebuying it at the new lower price, rinsing and repeating? Obviously at a small scale this difference would be negligible and overshadowed by commissions, but lets say I owned 10% stake.

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You are misunderstanding what makes the price of a stock go up and down.

Every time you sell a share of a stock, there is someone else that buys the stock. So it is not accurate to say that stock prices go down when large amounts of the stock are sold, and up when large amounts of the stock are bought. Every day, the amount of shares of a stock that are bought and sold are equal to each other, because in order to sell a share of stock, someone has to buy it.

Let me try to explain what actually happens to the price of a stock when you want to sell it.

Let's say that a particular stock is listed on the ticker at $100 a share currently. All this means is that the last transaction that took place was for $100; someone sold their share to a buyer for $100.

Now let's say that you have a share of the stock you'd like to sell. You are hoping to get $100 for your share. There are 2 other people that also have a share that they want to sell. However, there is only 1 person that wants to buy a share of stock, and he only wants to pay $99 for a share. If none of you wants to sell lower than $100, then no shares get sold. But if one of you agrees to sell at $99, then the sale takes place. The ticker value of the stock is now $99 instead of $100.

Now let's say that there are 3 new people that have decided they want to buy a share of the stock. They'd like to buy at $99, but you and the other person left with a share want to sell at $100. Either one of the sellers will come down to $99 or one of the buyers will go up to $100. This process will continue until everyone that wants to sell a share has sold, and everyone who wants to buy a share has bought. In general, though, when there are more people that want to sell than buy, the price goes down, and when there are more people that want to buy than sell, the price goes up.

To answer your question, if your selling of the stock had caused the price to go down, it means that you would have gotten less money for your stock than if it had not gone down. Likewise, if your buying the stock had caused it to go up, it just means that it would have cost you more to buy the stock. It is just as likely that you would lose money doing this, rather than gain money.

  • 8
    And when you "rinse and repeat", trading fees will eat you alive. – gnasher729 Feb 17 '15 at 10:09
  • "In general, though, when there are more people that want to sell than buy, the price goes down, and when there are more people that want to buy than sell, the price goes up." -- more specifically, you can imagine that there's a queue of potential buyers, lined up in order of their offer price. Some dude wants 100 shares at $99, someone else wants 50 shares at $98, etc. If you decide to sell 150 shares at the prices they offer, you'll "mop up" the front of the queue. The new offer price on the share is however far down the queue you get. – Steve Jessop Feb 17 '15 at 14:09
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    ... there are (almost) always people who want to buy and people who want to sell. The question is how far apart the prices are at which they want to do it, not how many of them there are. When we say "more people want to sell than buy", what we really mean is, "more people are willing to sell for market price than buy for market price". It's more or less tautological that the price falls, since some of those purchases must be satisfied from down the queue. And everything applies in the opposite direction too, if you want to buy now then you have to work your way up the queue of sellers. – Steve Jessop Feb 17 '15 at 14:21
  • @SteveJessop Right. I was trying to keep it simple for illustration purposes. If there are 10,000 total shares available for sale where the sellers are asking $100, and buyers are bidding $100 for only 100 shares total, the price will likely drop. Supply and demand. – Ben Miller Feb 17 '15 at 16:06
5

There are several reasons.

First, if you sell your stock "at any price", you may be selling it for less than you originally bought it for. Thus you will take a loss right at the beginning of your scheme. If you "rinse and repeat", the problem only gets worse. Every time you sell your stock, you will have to sell it at an even lower price in order to lower the price even more. Then you buy it back and. . . just resell it an even lower price? It should be clear that you are not making any money this way.

Second, even if you don't sell it at an absolute loss, you must sell it at a relative loss in order to lower the price. In other words, if someone will currently buy your shares for $X, and you want to lower the price, you must sell them for less than $X. But you could have made more money by selling them for $X, since someone was already willing to buy them at that price. In order to bring the price down significantly, you have to sell the stock for less than people currently believe it is worth, which means you're incurring a loss relative to just selling it at the market rate. Of course, you can still make money if it goes back up again, but selling it at an extra loss this way just makes it harder to break even.

Third, if you sell the stock at $X, whoever you sold it to is not going to sell it right back to you at $X, because then they would not make any money. You could in theory buy it from someone else, but the same principle holds: if the stock price has just gone down, people who have it may be waiting for it to go back up. This is doubly true if anyone suspects you have been trying to manipulate the stock price, because they will then suspect that the price drop is artificial and it will soon go back up.

Fourth, even if someone did sell it right back to you at the price you sold it for, then what? You now hold the stock at a lower price, but you don't gain unless it goes back up. If it wasn't going up before until you took action, there is no reason to suppose it will go back up now. In fact, if you had enough shares to significantly influence the price, other people may have been fooled into thinking the value is actually lower now.

The basic problem is that, in order for you to buy it at a low price, someone else has to sell it at that low price. It is easy to sell someone a stock for less than it's worth, but it will be hard to get people to sell it back to you for less than it's worth. If you engage in deceptive practices to get people to do this, you may be guilty of securities fraud.

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There are a few people that do this for a living. They are called "market makers" or "specialists" in a particular stock.

First of all, this requires a lot of capital. You can get burned on a few trades, a process known as "gambler's ruin," but if you have enough capital to weather the storm, you can make money.

Second, you have to be "licensed" by the stock market authorities, because you need to have stock market trading experience and other credentials.

Third, you are not allowed to buy and sell at will. In order to do your job, you have to "balance the boat," that is buy, when others are selling, and sell, when others are buying, in order to keep the market moving in two directions.

It's a tough job that requires a lot of experience, plus a license, but a few people can make a living doing this.

  • You do not have to be licensed to be a market maker; you don't even have to enter into a special agreement with an exchange in order to be a market maker (and therefore you don't have to balance the book). However, if you do enter into an official market maker agreement with an exchange you will receive highly advantageous fees/rebates. So companies that operate in this arena have to choose between onerous requirements + generous pricing vs. no requirements + painful pricing. – dg99 Feb 18 '15 at 17:58
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    Agreed. No special license is needed to provide liquidity by buying at the bid and selling at the ask. In fact, this is one of the main things high frequency traders do. The result is that the bid and ask are close together so you get a fair price whether you are buying or selling. – farnsy Feb 19 '15 at 6:36
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I think the simple answer to your question is: Yes, when you sell, that drives down the price. But it's not like you sell, and THEN the price goes down. The price goes down when you sell. You get the lower price.

Others have discussed the mechanics of this, but I think the relevant point for your question is that when you offer shares for sale, buyers now have more choices of where to buy from. If without you, there were 10 people willing to sell for $100 and 10 people willing to buy for $100, then there will be 10 sales at $100. But if you now offer to sell, there are 11 people selling for $100 and 10 people buying for $100. The buyers have a choice, and for a seller to get them to pick him, he has to drop his price a little. In real life, the market is stable when one of those sellers drops his price enough that an 11th buyer decides that he now wants to buy at the lower price, or until one of the other 10 buyers decides that the price has gone too low and he's no longer interested in selling.

If the next day you bought the stock back, you are now returning the market to where it was before you sold. Assuming that everything else in the market was unchanged, you would have to pay the same price to buy the stock back that you got when you sold it. Your net profit would be zero. Actually you'd have a loss because you'd have to pay the broker's commission on both transactions.

Of course in real life the chances that everything else in the market is unchanged are very small. So if you're a typical small-fry kind of person like me, someone who might be buying and selling a few hundred or a few thousand dollars worth of a company that is worth hundreds of millions, other factors in the market will totally swamp the effect of your little transaction. So when you went to buy back the next day, you might find that the price had gone down, you can buy your shares back for less than you sold them, and pocket the difference. Or the price might have gone up and you take a loss.

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The main thing you're missing is that while you bear all the costs of manipulating the market, you have no special ability to capture the profits yourself.

You make money by buying low and selling high. But if you want to push the price up, you have to keep buying even though the price is getting high. So you are buying high. This gives everyone, including you, the opportunity to sell high and make money. But you will have no special ability to capture that -- others will see the price going up and will start selling within a tiny fraction of a second. You will have to keep buying all the shares they keep selling at the artificially inflated price.

So as you keep trying to buy more and more to push the price up enough to make money, everyone else is selling their shares to you. You have to buy more and more shares at an inflated price as everyone else is selling while you are still buying.

When you switch to selling, the price will drop instantly, since there's nobody to buy from you at the inflated price. The opportunity you created has already been taken -- by the very people you were trading with.

Billions have been lost by people who thought this strategy would work.

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protected by Chris W. Rea Sep 18 '17 at 0:14

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