When selling stocks at a stop-loss price during a crash, who do I actually sell them to?

So who, and why, actually purchases stocks in the few minutes of an ongoing crash?

Other investors who are willing to buy at your price (for reasons unknown). You seem convinced that if you are certain of a downfall and the future is hopeless, then everyone else is too. But some may see it as a value buying opportunity. Perhaps other investors see it as an opportunity to "buy low" and hold on until the immediate "crash" is over, profiting on the way back up.

Or perhaps you're right, and you happen to catch a fool on the other end.

Who knows - and who cares? You sold it for what you wanted - why does it matter why anyone else bought it for that?

Maybe more succinctly, think of a famous quote by Warren Buffet (known for value investing):

Be greedy when others are fearful and fearful when others are greedy.

If you are skilled enough to know that there is no upturn in sight for the next few minutes then you should be shorting the stock during the drop and racking up nice gains. Collapsing share price (in minutes) and parabolic share price increase (in minutes) can reverse sharply in a heartbeat.

In your hypothetical situation where stock XYZ is dropping dramatically from $85 to $30 over the course of an hour (no gap down), when the drop begins, how many people know that the bottom will be at 70? At $60? At $50? At $40? At $30? Absolutely no one.

There are many reasons why buyers step in during the drop:

• Buyers may be covering short positions
• If index futures trade at a premium, institutions will arb the difference (buy stocks, sell the futures)
• Those that previously bought at lower prices and sold for a gain are willing to buy the shares again.
• Value investors may have a lower price at which they are willing to own the stock
• Some investors dollar cost average
• The lower price affords a higher yield which dividend growth investors seek.
• Collapsing stocks don't decline linearly in a straight line for the entire drop. There may be multiple small price recoveries. Traders utilizing technical analysis indicators observe this and buy, trying to scalp gains.

If it was that obvious to everyone that price was going to drop from $85 to $30, no one would buy on the way down. If you look at the volume traded during such drops, the volume traded during it tends to dwarf normal trading volume. In reality, market participants do not have the predictive clairvoyance that you think they have.

In addition to what others already wrote:
Be sure to understand what a STOP-LOSS order really does: it does not stop your loss for sure, but tries to do so.

What happens when the stock trades the first time below your stop-loss price is that an order to sell at market price is generated, and your stock is sold with the next transaction (that has enough volume), no matter what price it has.
This next transaction might be above the stop-loss price; just below the stop-loss price; far below the stop-loss price; very far below the stop-loss price; it also might happen one microsecond later; or a minute later; or days later; - or never.
If - as you proposed - everyone agrees that this stock is a dead horse, no further trades would happen, and your stock never sells.

It is a common misunderstanding - from beginners, but also from some supposedly experienced traders - that a 'stop loss' executes at the stop-loss price. This is not what it does.

Two types of markets

1. Order book markets where buy and sell orders for trades at different prices wait to be filled. If you trade at market you are filling the most competitive orders.
2. Dealer markets with market-makers who buy into- and sell out of their inventory of securities like a second hand car dealer.

In case 1), if you have placed a stop loss order then your order will be on the order book and at some point will be filled — just not instantly like a market order.

In case 2) the market maker will fill your stop loss order out of their inventory. In the NYSE Designated Market Makers run an order book like 1) but are also dealers as in case 2). If there are no matching orders on their order book they have to fill your order by buying your stocks into their own inventory.

Those who want to buy the dip, and those who are trying to catch a falling knife would be two categories.

The warnings about stop losses not being guaranteed to fill at your stop loss prices are the most important thing you can take away from this question.

But I'd like to add a little more insight into the psychology of some buyers, mainly value investors. Value investors believe stocks have both values and prices, and attempt to purchase stocks at prices offering a significant discount to what they estimate is the stock's actual value.

The most famous description of how value investors should treat a market plunge is by the Father of Value Investing, Ben Graham, in his "Mr. Market" parable from his book "The Intelligent Investor". His student Warren Buffett explains it here, and I'll try to summarize the key points in what he wrote.

"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.

...

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game."