Investment Matters


Dancing stock prices
Though there are certain economic and financial indicators like inflations, interest rate scenario etc that contribute to the movement of stock prices, a lot remains hidden behind this price movement game.

All of us know about the unpredictable and ever changing nature of stock market. It’s the market which lives with a life of its own, reacts to situations and leaves investors either reaping profits or with nothing at all..A range of factors affect the market, starting from company related news to macroeconomic trends like inflation, rupee gaining or weakening, oil prices etc.
One of the most frequent and visible changes taking place in the stock market is the stock price. Market forces lead to fluctuations in the demand and supply of shares, which in turn trigger change in share prices. We hardly see stock price remaining stagnant and it always remains swinging. The prices move up when more people want to buy a stock than to sell it. This situation triggers demand. Prices witness fall when more people resort to selling of a stock than buying it.
So, the theory of supply and demand leads to swinging of stock prices continuously. While looking closely at the demand and supply theory, it becomes visible that greed and fear among the investors plays a major role in driving the stock prices. Investor psychology is that they buy when they feel the stock is affordable and off-load it when they feel the stock is already over-valued. They resort to selling of stock mostly to buyback when the price drops later.
One of my acquaintances raised some interesting queries about the stock prices. What ignites change in demand and supply of stocks? Why do stock prices change? When we try to find an accurate answer to these queries we find a section of believers who believe that it isn’t possible to predict how stock prices will change. While others think that by drawing charts and looking at past price movements, we can determine when to buy and sell a stock. Amid this confusing situation, the only thing we know is that stocks are highly volatile and exposed to rapid change in prices. Precisely, there is no consensus as to why stock prices move the way they do. Though there are certain economic and financial indicators like inflations, interest rate scenario etc that contribute to the movement of stock prices, a lot remains hidden behind this price movement game.
Here let me tell you something about market psychology. There are analysts who link pricing of a stock to the performance of a company. But it is also a fact that stocks of companies with good numbers see their stock price falling. This means, the market psychology has nothing to do with the strong fundamentals of a company. The problem is to know what the market psychology is for a particular stock. Things like the state of affairs of the company & the industry can help you to make an educated guess on market psychology, but it is impossible to know how each and every factor will affect a stock price. Market psychology cannot be read into a chart pattern.
Meanwhile, one of the most common queries about stock price is regarding its impact on the company. Most of the people get confused when the company shows concern over the performance of its stock in the secondary market. Notably, the company that issues the stock does not participate in any profits or losses resulting from trading of its stock. Then, why companies are so obsessed with their stock prices? After a company has issued shares, why should it care about pricing of its stock in the market?
After the shares of a company are listed in the stock markets, it’s the buyer and the seller who make profit or loss out of the trading of shares. During the transaction they set the price of the stock. But this pricing has a profound effect on the company and determines health of the company. Stock analysts say that among many factors influencing stock prices, the most important is earnings by the company which has issued the stock.
Normally a falling price can severely hit morale of a company. There are basically two kinds of falls in shares – general fall and specific fall. If there is a fall in general share prices then the company would not get impacted too much. In a volatile environment, rise and falls in the share prices won’t affect overall business of the company directly. But in a specific fall shares of a particular company witness fall, which may see a sharp fall in share price relative to other companies or rest of the stock market. Why companies witness specific fall of its shares? Of course, the fundamentals of the company may have weakened and investors show their shaky optimism about prospect of the company to perform its businesses in the given situation. In this specific fall in share price scenario, the company becomes vulnerable to a large scale shakeup. Notably, a large fall in share prices could cause wider economic problems.
(The views are of the author & not the institution he works for)