Post by oldman on Jun 23, 2014 10:33:12 GMT 7
The stock market is like a game and like all games, before you start playing it, you have to learn the rules.
The most important rule to remember is that every listed company has a fixed number of shares. This is unlike a commodity like gold where you can keep mining for more. You cannot mine for more shares. It is not like a plant either. You cannot grow more shares. Shares can only be issued by the company. In other words, the company controls the number of shares floating around.
The second important rule to remember is that share prices will go up if there is more demand than there is supply... regardless of the company fundamentals. When more people want the shares than what is available in the market, the share price is likely to go higher. It does not matter if the shares are over-priced or under-priced. If more people want the shares and are willing to pay more for the shares, the price of the shares will go up until an equilibrium is reached when the number of people wanting to sell is equal to the number of people wanting to buy.
This is why it is not uncommon in our stock market to find shares that go up 5 to 10 times within a few trading days or weeks. It is most unlikely that the fundamentals of the company could have changed significantly during this short period of time, such that the company is now worth 5 to 10 times more. What is simply happening is that there are more buyers willing to pay higher and higher prices.
Human nature is such that when stock prices rise, everyone gets excited and want to join in the rush. They do not want to miss the boat. Most of the buyers would not even bother to learn more about the company and its fundamentals. They would rather believe in the gossips on the stock, in the hope that even more people will rush to buy and the share price keeps galloping upwards.
As time goes by, more people will be sucked in, especially those who view the stock market as a gambling den. These folks are also unlikely to know much about fundamental investing. If they do, they will realise very early on, that the rise in the stock price is solely due to more people wanting to buy the stock than what is currently available for sale.
It is also best to ignore all those explanations and justifications provided by those whom you think will know more than you because, more than likely, they know just as much as you do. It is their jobs to try to be appear more knowledgeable when it is obviously clear that the rise in the stock price is simply due to more people wanting to buy than there are stocks available, hence pushing up the share price until the equilibrium is reached.
Then, it is only a matter of time before everyone else realises that this mania has to end. When that happens, investors will rush for the exit as no one wants to end up carrying the baby. When stocks fall, they can fall much quicker than when they are rising because when stocks fall, there will be much fewer people willing to take the risk and buy when everyone else is selling. When stocks rise, there will always be investors wanting to take profits and hence, these investors provide the shares to sell to other investors. This is why stock prices usually rise slower than when they fall.
The third rule you have to remember is the law of the jungle. The elephant is king. If you have lots of money, like a fund manager or a high networth investor, you can move the market. Also remember that the jungle is full of wolves and these animals hunt in packs. Hunting in packs create brute force and gives them much more buying and selling power. In the stock market, wolves are all around us. They can appear to be be helpful but their main motivation is to take care of themselves first. The jungle is a place where only the fittest survive. In the jungle, if you are an ant, be aware of the presence of elephants and wolves as you don't want to be trampled by them. To survive in the jungle, you have to know your own limitations and just ride the waves created by the elephants and wolves.
Whether you are a fundamental investor or a trader, you are exposed to the whims and fancy of this game called the stock market. The sooner you realise that this game is being played every second of the day, the more likely you will benefit from the stock market. To succeed in the stock market, you need to master the game of supply and demand as this skill will help minimise your losses and maximise your gains.
To master this game, you need to appreciate that supply is easier to quantify than demand. If a company continuously issue shares at lower and lower prices, this action will increase the available supply of shares. Without a strong demand, the shares are more likely to fall. Demand is unlikely to be strong as investors are shrewd enough to know that there will be more supply of shares in the near future.
Demand though, is a lot harder to quantify but sometimes, the study of time and sales data and technical analysis charts may give you some clues. Regardless, supply data is usually easier to decipher than demand data. All investors should spend quality time understanding the supply of shares in the companies that they have invested on top of just appreciating the fundamental data surrounding those shares.
The most important rule to remember is that every listed company has a fixed number of shares. This is unlike a commodity like gold where you can keep mining for more. You cannot mine for more shares. It is not like a plant either. You cannot grow more shares. Shares can only be issued by the company. In other words, the company controls the number of shares floating around.
The second important rule to remember is that share prices will go up if there is more demand than there is supply... regardless of the company fundamentals. When more people want the shares than what is available in the market, the share price is likely to go higher. It does not matter if the shares are over-priced or under-priced. If more people want the shares and are willing to pay more for the shares, the price of the shares will go up until an equilibrium is reached when the number of people wanting to sell is equal to the number of people wanting to buy.
This is why it is not uncommon in our stock market to find shares that go up 5 to 10 times within a few trading days or weeks. It is most unlikely that the fundamentals of the company could have changed significantly during this short period of time, such that the company is now worth 5 to 10 times more. What is simply happening is that there are more buyers willing to pay higher and higher prices.
Human nature is such that when stock prices rise, everyone gets excited and want to join in the rush. They do not want to miss the boat. Most of the buyers would not even bother to learn more about the company and its fundamentals. They would rather believe in the gossips on the stock, in the hope that even more people will rush to buy and the share price keeps galloping upwards.
As time goes by, more people will be sucked in, especially those who view the stock market as a gambling den. These folks are also unlikely to know much about fundamental investing. If they do, they will realise very early on, that the rise in the stock price is solely due to more people wanting to buy the stock than what is currently available for sale.
It is also best to ignore all those explanations and justifications provided by those whom you think will know more than you because, more than likely, they know just as much as you do. It is their jobs to try to be appear more knowledgeable when it is obviously clear that the rise in the stock price is simply due to more people wanting to buy than there are stocks available, hence pushing up the share price until the equilibrium is reached.
Then, it is only a matter of time before everyone else realises that this mania has to end. When that happens, investors will rush for the exit as no one wants to end up carrying the baby. When stocks fall, they can fall much quicker than when they are rising because when stocks fall, there will be much fewer people willing to take the risk and buy when everyone else is selling. When stocks rise, there will always be investors wanting to take profits and hence, these investors provide the shares to sell to other investors. This is why stock prices usually rise slower than when they fall.
The third rule you have to remember is the law of the jungle. The elephant is king. If you have lots of money, like a fund manager or a high networth investor, you can move the market. Also remember that the jungle is full of wolves and these animals hunt in packs. Hunting in packs create brute force and gives them much more buying and selling power. In the stock market, wolves are all around us. They can appear to be be helpful but their main motivation is to take care of themselves first. The jungle is a place where only the fittest survive. In the jungle, if you are an ant, be aware of the presence of elephants and wolves as you don't want to be trampled by them. To survive in the jungle, you have to know your own limitations and just ride the waves created by the elephants and wolves.
Whether you are a fundamental investor or a trader, you are exposed to the whims and fancy of this game called the stock market. The sooner you realise that this game is being played every second of the day, the more likely you will benefit from the stock market. To succeed in the stock market, you need to master the game of supply and demand as this skill will help minimise your losses and maximise your gains.
To master this game, you need to appreciate that supply is easier to quantify than demand. If a company continuously issue shares at lower and lower prices, this action will increase the available supply of shares. Without a strong demand, the shares are more likely to fall. Demand is unlikely to be strong as investors are shrewd enough to know that there will be more supply of shares in the near future.
Demand though, is a lot harder to quantify but sometimes, the study of time and sales data and technical analysis charts may give you some clues. Regardless, supply data is usually easier to decipher than demand data. All investors should spend quality time understanding the supply of shares in the companies that they have invested on top of just appreciating the fundamental data surrounding those shares.
