What moves stock prices?

I'm a bit perplexed by the way share prices move. When, for instance, a bank's shares are in freefall, anyone entering the market to sell must find a buyer at each point in the descent - but who's buying the shares? I can see that the price might plummet from, say, $10 to $5 - until buyers see an over-correction, but what seems to happen is a steep but gradual decline, with buyers at every level?

I'm going to go ahead and disagree with Mr. Fox here.

The reason people pay more or less for shares of a particular company is because person A (seller) has decided that the amount of cash he is receiving today is > the value of owning the stock today. Meanwhile, person B (buyer) has decided that the value of owning the stock today is > the value of the cash he is giving up for it.

Basically, people pay more or less for a stock because they have different opinions on how much that stock is worth. And by stock, I mean the company that issued it.

Say you think Ford is going to rebound due to its overseas operations and partnerships with the Tata and Tesla companies. So you think Ford at $2 (what it was trading at last week) is undervalued and/or will go up at some future date and you're willing to hold onto the stock until then. The guy selling you the stock bought in at $6 thinking the same thing, and, having lost 2/3 of his investment has decided to cut his losses and get out. Or perhaps he just really needs the cash to pay off a loan, or whatever. Person B has decided that he would rather own $2 than a share of Ford and you have decided that you would rather own a share of Ford than $2. The stock market provides a place to make that exchange.

That's why people buy and sell at different price levels. They have differing opinions about the core value and/or growth potential of the company they are buying an ownership stake (stock) in.

This is also why low information investors tend to buy high and sell low. The best time to buy a stock is when few people have realized that changing conditions, a new product or marketing strategy, or a new management team have significantly increased the value and/or growth potential of the company but this increased value has not yet translated to the general market (i.e. increased sales and profitability).

The best time to sell a stock is when few people realize that due to changing conditions, or new competition, or a new management team that the value and/or growth potential of the company has significantly decreased but this reduced value has not yet translated to the general market (i.e. layoffs, falling sales, and plant closings.) Low information investors buy when good news hits the general market and sell when bad news hits it. This leads to less than optimal returns and finding out information like this ahead of time is what you supposedly pay professional money managers for.

You left out the influence of dividends. For example, the dividend yield on GE stock today is about 6.8% (the annual dividends at the rate most recently paid out by the corporation, divided by its current stock price). If you think that GE can continue to pay dividends at that rate, plus increase the dividends in the future, then GE looks like a great buy at the current price. If you think GE's profits will get hammered in the current downturn and GE will need to cut its dividend, then maybe you would be a seller of GE stock.

The buyer is focusing on the upside (i.e., greed), the seller sees more of the downside (fear). Each may have undertaken what he believes to be a very rational analysis, they just arrived at different conclusions.

There can also be outside factors not directly related to the company's performance. The seller may be a mutual fund or hedge fund whose investors are redeeming their fund investments, forcing the fund to sell even if its management thinks it should be buying at the current price. Or the seller could be experiencing a margin call (ouch!).

Of course, to get the full story, we all will have to buy Justin's soon-to-be-published book.

@lifeonmars - a cynical response would be with millions of people involved in the market, half of them are of below average skill at valuating stocks . so yes, there are people enough to buy in at different levels. But also - information incorporation / diffusion /interpretation on news (earnings/bankruptcy etc) can take time to adjust as people figure out what it means. But honestly, I'd go with the below average answer first.

@Sean/@Harry in addition to points you make, we also have:
a. different time horizons / risk appetites of different individuals. Perhaps the seller thinks the stock will still go up, but is getting near retirement.
b. you guys also do not comment on the fact that not only can 2 people differ on the right price for an individual stock, but on multiple stocks and therefore the relative attractiveness of each - we can both think Ford is going to do well, but you think GM is going to do even better.

It seems worth pointing out that every time a transaction occurs, it is because the buyer and seller AGREE on a price (excluding transaction costs). The need to balance the number of buyers and sellers is what moves the market price. It's simple supply and demand.

The "value" of a stock is determined by its discounted cash flows. Cash flows to equity can occur in the form of dividends, share repurchase, buyout, etc.

The price is determined by investor estimates of value and expectations of future price movements. Obviously there is a lot of uncertainty, which is why there are plenty of buyers and sellers.

Let's not lose sight of the fact that the stock represents an ownership share of the company. That gives it something tangible right there - the "book" value (and yes, I realize that can change rapidly due to other factors). Over and above that, a stock has value based on the belief that its future prospects are worth more (or occasionally less) than the book value. Think of the stock market as a market of future expectations, and I think you're closer to understanding the market value of a stock.