Buying and selling in the stock market

I understand that when buyers dominate the market the prices go up and when sellers dominate the prices go down (of course this is an oversimplification).

People want to treat trading as some mechanical force. People are buying and selling shares, and the prices reflect where they want to transact. As news comes in, people can change their minds about a company’s value without any transactions taking place.

For example, if a company announces accounting irregularities and an imminent bankruptcy, everybody is going to revise down what they think the shares are worth. Prices will be adjusted lower by everyone, and you could even have more people lining up to buy on the theory that the company might have more value than what is suggested by the price.

I thought then whenever someone sells some shares someone else buys them.

This is always the case, by definition. To deal with you other questions, in an ideal world, if we add up all investor’s shares, the net position is 100% of the amount outstanding.

(The real world is slightly messier. Stock trading does not settle instantaneously, settlement is later. This allows short sellers to “sell” shares that they do not currently own - they borrow them from somebody else before the settlement. This obviously complicates things, but it makes sense once we realise these are credit transactions. A seller is not immediately selling, instead they have entered into a contractual obligation to deliver shares at a future date.)

When a long stock trade occurs legal titles transfer as follows:

1. Ownership of "cash" transfers from the buyer to the seller; and

2. Ownership of "shares" transfers from the seller to the buyer.

So the trade is a swap of cash and shares of stock at the total transaction price. Divide the transaction price by the number of shares of stock involved in the trade to get price per share.

Buyers and sellers arrive at the price per share based on emotions that motivate their actual buy, hold, and sell decisions. We call these emotions "sentiment".

There is often reference to "cash on the sidelines" which means investors are holding cash, typically in money market mutual funds, and this cash is waiting to be invested in shares of stock. However for every stock buyer there is a seller who takes cash so the price level of shares of stock is not directly coupled to the amount of funds held in money market mutual funds or other investment accounts. The idea that cash is building up on the sidelines to fuel price increases in the stock market is sometimes called a fallacy.