Even if you have never taken an economics class, pricing power is likely a familiar concept. Sellers can charge premium prices if their product or service is superior to others. They will have even more pricing power if what they offer is in high demand while also unavailable elsewhere or in limited supply. Stock markets work somewhat differently; as each share of stock has the same market value, no matter who it is bought from or sold to.
Supply & Demand
Another difference is that supply and demand levels for stocks stay fairly constant. The supply of stocks typically only changes when companies issue new shares, which may not happen often. However, when it does occur, a change in the number of shares does not typically alter the market’s view about the value of a company. Demand for stocks is also firmly intact; as even during steep price declines, falling prices mean there are still buyers. Without buyers markets would halt.
Although supply and demand does not affect stocks the same way as other markets, pricing power is still a present force. One economic theory that many are likely innately familiar with is that purchasers have pricing power when buying in bulk; such as warehouse stores that offer lower prices, with the catch that you have to buy more. Stock prices are influenced much in the same way. Buyers and sellers of more shares will make prices, while buyers and sellers of fewer shares will be takers of prices set by larger orders.
For example, an order of 1,000 shares will have more pricing power than an order of 10 shares. The largest stock orders are typically made by large firms and institutions, who buy and sell in lots of 100 shares. Smaller firms or individuals rarely have enough pricing power to influence stock values, except for stocks that have few buyers and sellers. For example, though GameStop shares have an average of around a billion dollars in transactions per day, that amount is 90% lower than the daily amount in some of the most liquid stocks, such as Facebook. So while smaller orders may be able to move prices of less-liquid stocks, they may not be enough to influence highly-liquid ones. How those who place orders that are big enough to influence stock prices decide values to buy and sell at is a topic for another edition!
September 1, 2021
Jonathon Oden, the author of this article, does not own shares of GameStop or Facebook.
Markets Demystified is published the first and second Wednesdays of each month,
and is meant to help readers understand how stock market investing relates to household and personal finance.
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