Stock market behaves like all other market in a competitive economy. The market price of a stock is determined by the supply of stocks from the seller and the demand of the stocks from the buyer. Basically, supply and demand rules are at work here. If more people want to buy a stock (demand) than people who want to sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. In the bull market, when the price performance of stocks is great, everybody wants to buy in. This makes a bigger demand side in the market, and cause the price to be higher. On the contrary, in a bear market, the demand is less than the supply, hence the drop of the price.
The internet boom in the late 1990s and the recent commodity boom spurred a high demand from the investors for the internet and commodity stocks. The performance of the IPOs was extraordinary. The 2008 financial crisis, on the contrary saw investors fled the stock market and left nothing to be spared. The stock market index plummeted to the worst level since the Great Depression years. This come to another piece of thought that stock prices are also very much depend on psychological elements, such as fears and greed.
Fears, usually takes on two basic forms, which are fear of loss and fear of missing out. The fear of loss makes investors selling stock at the first sign of trouble. In the 2008 stock market crisis, fear was dominated the trading and investors. Everybody fears, panic and sell their stocks. Stock index plunged around 40 to 50% around the world. The fear of missing out compels investors to abandon the fundamental investing rules and rush to buy stocks so that they don’t miss out on another run. This will cause a lot of demand for the stock and increase the price. Greed is not unlike fear of missing out; the difference is that greedy investors are already in the market. They are not missing out, but they want more money and profits come on their way.
They are banking on the belief that stock market will always go up in price. The media also play a lot of part here. Information about stocks and company are available freely or almost freely in the internet, and that the media can drive and change sentiment of any given company and its stock just in a blink of an eye. Emotion of the investors (retail investors or fund managers alike), the amount of market participants and the media, fuel the volatility in the stock market. Two or three decades ago, it was uncommon to have index change of 2-3% in one day, yet now, we are witnessing DJIA and other markets around the world moving in that range in a heartbeat. Stock prices are more and more driven by the sentiment, emotion, and psychology, all of which are driven by the free flows of information from the media.
Currently a stay at home mother of three, Nanindyas is an active investor on the Australian Stock Exchange (ASX). An accountant by training, she did some lecturing and teaching and also involved in various accounting projects, before deciding to take a break to raise a family. Article Source: http://EzineArticles.com/?expert=Nanindyas_Susanti |
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