What Really Controls the Stock Market?
Apart from the big financiers and institutions you will find that in reality it is “Fear and Greed” that drives the market along. Of course traders’ reactions also play a part. Here. Is an example:
You have selected your next profitable stock and have decided to buy. It looks great. It is currently priced nicely at a nice affordable $1.00 per share. Unfortunately quite a few other traders think it is great as well and the share price is starting to rise upwards.
So suddenly instead of one choice (buying) you now have several.
1. Stay with the original price and wait for the market to hopefully slow and reverse back to your price.
2. Chase the price and collect the number of shares you have already decided on previously.
3. Or chase the price but keep to your dollar limit thus buying a smaller parcel of shares.
A few traders and investors will wait for the market to recede, but they are in the minority as the majority of traders will chase the price.
The faster the share price moves away from them the more emotional the trader becomes. (Sounds familiar?)
Frightened that they might miss out they proceed to outbid the other buyers which means you have to pay more for the stock than you intended.
Although each trade made is an individual one. Counted altogether they make crowd sentiment and a crowd reaction. This is what is controlling the share market.
Remember sellers are pessimistic .This is because they believe that the share price is going to head downwards. So as to either lock in profits or stop further losses they sell.
Now the buyer is an optimist who believes that the share price is headed only one way and that is upwards.
Every single share transaction that occurs is made up one of these. Both of the traders are of the opposite opinion. Only one will be right, and only time will tell which one.
What. Affects Share Prices?
Share prices go upwards or downwards during a typical trading day.
This depends on the current emotion which is affecting that particular stock at that time. It will most likely be either Fear or Greed.
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Fear is usually prevalent in one or two forms.
You have the type of fear the share price is going up and they are frightened that they will miss out on the profits. So traders will chase the price which of course only pushes the share price up further still.
Or alternatively there is the Fear that the share price will be heading downwards and they will be losing what profit they have achieved or that the value of the stock will recede to a level where they will realize a substantial loss. Therefore they panic and sell in droves which only succeed in escalating the downward trend in the share price because of the selling volume which is unleashed suddenly on the market.
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Greed comes into play when the price is heading upwards. Not being content with a moderate profit of 10 - 20 % a trader will hang on and hang on hoping for larger gains. Invariably the share price will fall dramatically and as always goes down at twice as fast as it originally went up, if not faster.
Because of laziness or more likely inexperience the average trader has not employed a stop loss to protect or to lock in their profits. Because of this lack of foresight or planning this ensures disastrous consequences and so the cycle of Fear and greed continues.
As always the law of Supply and Demand plays an important part in the share price. If stock is scarce and hard to come by then the share price will go upwards. On the other side of the coin if more stock is available for sale than there are buyers then the share price will descend so as to attract a buyer.
Usually if a share price is tracking sideways it is because the buyers and sellers are at status quo and content with the level at which the share price is currently at. Invariably it is either good or bad news which is the catalyst which will determine which way the share price will head in the future.
How Much Research Do You Do?
I was glancing through the local newspaper this morning and came across a thought provoking article. I stated that more share traders/investors need to do more research before they buy a stock.
At least a half of all Australians now invest directly in the share market. But as to what motivates them to buy and sell is an elusive mystery. Apparently less than one half do their own research when ever they make a buying or selling decision. And only one third actually do it consistently most of the time.
Of those that do their own research the most popular method used is searching amongst the various chat rooms and forums that are available on the net.
They predominately look for comments made about the various companies in the medias eye at the moment; plus any analysts reports and other annual reports that are also available at that time.
Three quarters admitted that Gut Feelings played a major part in their decision to buy and sell shares. And nearly half of those based their decisions on a Hot Tip. Most traders/investors do realize however that they have made a decision on insufficient information.
When asked if they sought professional advice before buying shares 56% responded Sometimes, while only 18% responded all the time. Amazingly 26% never seek professional advice at all.
The survey also showed a massive 78% never even valued a company before buying their stocks. Only 5% of the traders/investors follow the disciplined strategy of value investing.
It makes you wonder what methods the other 95 % of traders are using?
While we are on the subject of research I wondering how much research was done by the traders who sold off all their shares in the last week or so?
With this sub prime debacle now affecting Australia, I wonder how many stocks are directly linked to the mortgage industry.
Ideally if your stop losses were activated by this correction as it started to go downhill. You would have been in the envious position of being able to buy them all back again at bargain basement prices.
You would not have to worry about any capital gains losses as they will be more that compensated for when the market resumes its way upwards again. Rest assured it will as this correction is only one of many that will occur from time to time in the years ahead.
The main thing is to be prepared for them, and of course Do Your Research.
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What Really Controls the Stock Market?