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Comment by commandlinefan | Hacker News Reader

So, I feel like I should probably understand this better, but I still can't quite get my head around how buying a stock drives up its price. I understand this was all driven by "short sells" of Gamestop's stock: some hedge fund traders entered into a contract to buy some stocks at whatever price that stock was trading at at some point in the future, and then sold the stock (that they didn't yet have) at the price it was trading for now, predicting that the price would go down so they could buy it for less than they sold it. If that's what was going on, doesn't it require some uninformed yokel to buy the stocks in the first place? If people buying stocks drives the price up, and short-selling requires selling the stock before the price goes up, how does short selling ever work for anybody? Is there some "sweet spot" of stock selling that the hedge fund traders are hoping for where they can make back their money but still let the stock price fall?

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For most things that are traded they are liquid enough that individual short positions aren't meant to effect the price. They are basically bets based on research that indicates the thing being shorted is overvalued and will fall by itself. Of course people try to help it along by publishing their position and research, but the catalyst is not the short trade itself.

Gamestop went up because people discovered a fairly unique short squeeze opportunity. People piled in enough (through options) which caused a gamma squeeze exacerbating things as market makers needed to buy more stock to hedge their positions.

The 'price' of things is, simply put, the price between the bid and ask order books, so everything being traded has a list of people that will buy at a certain price and people that will sell at a certain price. For example, Stock A's price is 1$, but has people that are willing to buy it at 99c or below and people that are willing to sell at 1.01$ or above. When you buy, you actively fill the order of the guy willing to sell at 1.01$. Say he was the only one willing to sell at that price, the next person willing to sell is at 1.02$, so the spread moves up. If enough people buy, they will fill out the orders and move the price up. Others that were originally willing to sell at those prices may move their orders to a higher price because they see that people are willing to pay more which helps move the price up further. Selling is the same. This way the price is determined by how many people are willing to sell or buy at a certain price, the spread between those prices. Usually things are liquid enough that they are the same price and price movements are gradual.

i take a list of orders from a few grocery stores in my town and go to the market. i've got some orders from people who'll pay £1 for 10 potatoes, some that will pay 90p and some that will pay 80p.

i meet with the farmers. they're offering 10 potatos for £1. My order s at £1 gets filled. Theyh wont sell me any more, because more people have arrived who bid £1. Still More buyers arrive, armed with orders from people prepared to bid £1.10. Those buyers get their orders filled until yet people arrive and start bidding £1.20. potatos are in demand. those orders get filled and £1.20 is the new price.

Later, all the people offering £1.20 have gone home...there's only me left. THe farmers have some potatos left, but no buyers at £1.20 and no buyers at £1, so they lower the price further . I get my 90p order filled. noone else arrives, so farmers lower the price again, and they aceept my 80p offer..

i dont know if that makes any sense ?

its gets a litte more complicated, in that the owner of the market where the deals are done, must commit to filling everyone's orders - so they have some juggling to do . they take a small margin in between the bid price and the offer price, in return.

So in your analogy, it's up to the farmer to set the price for the potatoes. In this case, was it Gamestop who was setting the price? Or rather, the shareholders themselves... that is, the people who were buying the stock in the first place?

In his analogy, the potato is only worth what is worth what people are willing to pay for it, and the farmer will obviously sell to the highest price first.

This is how stocks worth: its only worth as much as what someone is willing to pay for it (shorting not included).

Simplistically, yes. At IPO when potatoes are very first introduced to market, he decides what he thinks they are worth. The market will quickly decide the 'real' price.

Whether his first asking price is £2.00 £12.00 the market will quickly decide the level. If potato's are the hype root vegetable, many buyers will appear, but if carrots are in fashion, the price of potato's must fall until in order to attract buyers

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