Yesterday, I talked about the distinction between stocks and shares and I posed a question, “What determines the price movement of a stock?”. Today, I am supposed to be talking about the stock price table but I will hold off on that. It is important for us as an investor to understand the price movement of a stock. Let us discuss the details of it.
The stock is like a market commodity whose price is exclusively determined by supply and demand. For example, if there is a demand for Apple stock (AAPL) today more than the supply, then the price of the stock would go up and vice-versa. What are supply and demand really mean here? The number of buyers with the number of shares they intend to buy and the number of sellers with the number of shares they intend to sell. When there are more buyers trying to buy shares but there are only few sellers willing to sell shares, then the price of the stock goes up and the price goes south if otherwise.
The next question is, what drives the demand (or interest) for the stock. This is really a million dollar question. Anyone would like to take a wild guess in the chat? The truth of the matter is no one really knows, but, people can take an educated guess. We only know the reason why after the fact - after the price went up or down. Once you know the reason, do not definitively apply the same reason in the future predictions. This is a grave mistake one would make. We can always come up with a theory but nothing is foolproof. I am sure you might have seen the analysts discuss the reasons why a certain stock price went/up or down in the magazines or TV but why can’t they reliably say prior to the change.
There are tons of resources available on the internet these days to predict the price movement but one thing you must understand the majority of them will be wrong. It is hard for anyone to quantify what percentage of them being correct or incorrect. This really depends on another dimension what is known as the market sentiment. You might have seen in the past year that the market is really doing well based on the upbeat sentiment about President Trump’s policies. Now, the probability of someone predicting correctly a stock to go up in the upbeat market is high, however, the probability of the same person to predict a stock correctly to go up in a negative market sentiment would be low.
As an investor, you need to learn that nobody can predict reliably the price of a stock and no one can time the movement of the stock or the market. You must carve this in a stone and keep it in a place where you can see every day so that in case someone runs up to you and say, “Dude this stock is going to up”, just smile confidently and say “I will look into it”. Do you need to close your ears and shut your eyes on these types of information? “No”, always take it with a grain of salt but don’t react on it right-a-way even if you think that you would miss the opportunity boat. Never go on a wild goose chase. Statistically, the people who lost most of the money are those who reacted to the news immediately without proper research and strategy.
In any trading, how would you explain the terms ‘bid’ and ‘ask’?
