Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
Originally published December 2025
Key Takeaway:
Market prices are set at the margin, meaning a small number of recent trades—not broad consensus—determine prices for everyone else.
Low trading volume can still move markets dramatically, creating the illusion of stability until liquidity suddenly disappears.
Forced or emotional selling at the margin can drive sharp repricing, even when fundamentals haven’t materially changed.
Understanding marginal pricing helps advisors explain volatility, overshoots, and sudden market dislocations to clients more clearly.
In last week’s blog, I introduced the idea of building a “mental toolbox” for helping explain markets - starting with the Keynesian Beauty Contest - aka how expectations about expectations often drive prices more than fundamentals.
This week builds directly on that foundation with a second mental tool - prices are set at the margin.
It’s a simple idea. Almost too simple. Yet it carries outsized consequences.
While most investors assume prices reflect broad agreement, they’re often dictated by a very small number of trades happening at the edges.
Understanding this helps explain why markets can look calm one moment, then suddenly reprice violently the next - even when nothing “big” appears to have changed.
Let’s break it down.
What Does “Prices Are Set at the Margin” Mean?
Here’s a thought that can mess with how you see markets:
The “price” of an asset class is often closer to a suggestion than a fact.
What I mean is - prices are set at the margin.
Basically, the most recent transaction establishes the reference price for every other unit.
It’s not the average price. Not what most owners would accept. Not what long-term holders think it’s worth.
It’s simply the last price at which a buyer and seller actually agreed - and that price becomes the for everyone else
For simplicity, imagine a neighborhood with 100 homes.
Nobody has sold for five years. Then one day, Bill decides to sell his house for $1 million and move to Arizona.
Suddenly, every other house on that street is now “worth” around $1 million.
Why? Because that’s the only price anyone has to anchor to.
Zillow updates it. Realtors adjust comps. And homeowners see their paper wealth surge - all based on one sale.
Now - flip the scenario. . .
The market freezes. And a bank forecloses on the same house – selling it for $500,000.
That single distressed sale just cut the “market value” (and perceived equity) of the entire neighborhood in half - even though 99 homeowners didn’t sell, didn’t move, and didn’t change anything about their homes.
The Three "Gotchas" of Marginal Pricing
There’s more nuance here, but three core ideas are worth keeping in mind. . .
Price vs. Value - Your neighbor might insist, “My house is still worth $1 million.” And he might be right about its intrinsic value - build quality, location, replacement cost, etc. But the market price is now $500,000. Price is simply what someone is willing to pay today, not what owners believe their assets are worth. And a single sale next door can reset the market price for every other home on the street.
The Role of Volume - For prices to move, a deal has to close. Asking prices don’t matter. Opinions don’t matter. If no one buys at $1 million, the price hasn’t moved. Actual transactions - however small - are what mark prices for everyone else.
The Liquidity Trap - Markets stay high as long as nobody moves. But because the price is set at the margin, it only takes a few "desperate" sellers to tank a market. For instance, if everyone tried to cash out and sell their $1 million homes at the same time, there wouldn't be enough buyers, - forcing a liquidity crunch. This is why prices often collapse much faster than they rise.
How Marginal Pricing Works in Stocks
But this isn’t just about housing. The exact same dynamic plays out in equities.
Take a mega-cap stock like Apple. On any given day, only a tiny fraction of Apple’s total shares outstanding actually trade. Yet those few transactions set the price for every other share - including the 99% sitting untouched in long-term portfolios, retirement accounts, and insider holdings.
So when Apple’s market cap rises or falls by hundreds of billions of dollars in a week, it’s not because everyone suddenly changed their mind. It’s because a small group of marginal buyers and sellers moved the price.
For example:
Roughly 23.3 million Apple ($AAPL) shares were traded yesterday
Apple has ~14.8 billion shares outstanding
Less than 0.2% of shares set the value for the other 99.8%
And it’s even more pronounced in smaller stocks.
BlackSky Technology ($BKSY) jumped ~12% on about 2.5 million shares traded as of yesterday's close.
The company has ~36 million shares outstanding
A small slice of activity re-priced the entire company sharply higher in just a few hours.
Same rule. Different scale.
The Illusion of Liquidity
This leads to what I call the illusion of liquidity.
As long as only a small number of people are trading in a balance, prices look stable and orderly. But if everyone tried to sell at once - whether homes, stocks, gold, or anything else - that marginal price would collapse quickly.
And remember, sellers don’t need a fundamental reason to sell. It might be a tax bill. A medical expense. A margin call. Any forced sale at the margin can reset prices for everyone else (creating both chaos and opportunity)
Thus, sellers don’t exit at the quoted price. They become the price - pushing it down on themselves as liquidity disappears.
That’s why markets can feel calm one week and violently unstable the next. Liquidity isn’t evenly distributed. It shows up when you don’t need it - and vanishes when you do.
There’s also a second, more overlooked danger. . .
Rising prices on low volume can create false confidence. Meaning - when an asset jumps 30–50% with very little trading, portfolios suddenly look richer on paper.
People feel wealthier. Bolder. And worse, they may borrow against those gains.
Then the price reverses.
Suddenly, the asset is worth less - but the debt is still there. What looked like wealth quickly turns into leverage at exactly the wrong moment.
That’s how small moves at the margin can turn into big problems for everyone else (including the financial system).
Why This Matters for Advisors
This concept belongs in every advisor’s mental toolbox.
When clients see prices swing wildly, it feels like the entire market is panicking. In reality, it’s often a small slice of participants setting prices for everyone else.
Why forced selling (margin calls, redemptions, liquidations) can move prices far more than “news.”
It also creates opportunity.
Because when prices are set at the margin, emotion-driven trades by a few can misprice assets for many.
The Takeaway
Prices aren’t as democratic as they first look. They’re not voted on by the majority.
Instead, they’re dictated by the marginal buyer and seller - the ones who buy and sell today.
Keep this in mind the next time prices move faster than the story.
And stay tuned - Part III of the Mental Toolbox is coming next.
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
