If you believe you are doing the right thing by selling a stock, and if the customer believes he's doing the right thing by buying it, one of you must be wrong. You will never know exactly who is on the other side of the transaction, but trying to understand who is buying from you, and why, can help you become a better investor.
Why You Are Selling
You might be selling stocks because you need the money, because you're rebalancing your portfolio, because you think it’s the right thing to do, or because emotions have gotten the better of you. Whatever the reason, the person buying from you might have a different time frame or opinion, or simply a cooler head.
Institutions account for 75 percent of all trading, so chances are you will be selling your stock to a professional – a specialist or market maker, an institutional trader, a mutual fund, a pension fund or a hedge fund. These institutions often trade in large blocks, so your shares may be rounded up with those from other individual investors and sold en masse in a block trade.
Specialist or Market Maker
The New York Stock Exchange has specialists assigned to maintain an orderly market in specific stocks. NASDAQ market makers – institutional traders who specialize, or make market, in specific stocks – essentially do the same. These guys trade the same stocks day in and day out for tiny profits, making money on volume. They are often on both sides of a transaction – both buying and selling. They can buy your shares and resell them in a matter of seconds for a tiny markup.
If you have a stop-loss order under your stock, a specialist or a market maker can drive the stock price down just to have your stops – and other investors’ stops – executed to generate more trades.
In addition to a different opinion, a portfolio manager at a mutual or a pension fund often has a different time frame. You might be cashing in your profits now, but a mutual fund could be looking two or three years down the road. Because they deal in millions of shares, funds take weeks or even months to accumulate positions in specific stocks. Your sell order might meet their standing order to buy at a specified price.
A professional trader is most likely to trade against you: Your loss is his gain. He buys from you because he thinks he can resell your shares at a profit. Professional traders often try to shake retail investors out of their positions by orchestrating sudden price drops to induce them to sell.
Officers and directors know their companies best and can be more patient, buying shares when nobody wants them, and holding them for years to realize their profits. It's entirely possible that when you unload your shares, you are handing them over to officers working at the company behind the stock.