What causes stock market
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The first reason is due to human nature. The stock market is an emotional creature that feeds on fear and greed. Both emotions are in ample supply in the market, and there’s money is to be made from the mistakes that occur because of them!
Another reason for the buying and selling is due to the media. Published quarterly earnings announcements can spike or spiral a
stock’s price, as can a positive or negative story regarding a company. These events are part of what is known as investor sentiment. Is the stock worth the investment? If the majority says “no” then the stock market price will plummet.
Not everyone has the same investment motivation. This results in different people buying and selling at different times, and different types of stocks. Speculators, for example, might be buying a stock, not necessarily because of its price or intrinsic value, but because it is “in play.” This occurs when the trading volume is higher than normal.
Did you think about stock market prices
on your last trip to six flags?
Most speculators like to buy into a trend. If they have enough money (and the share price is low enough), they can spike a stock price into the outer limits. Some make quite a bit of money doing so. When the trend fades, they’ll be selling off as fast as they bought, which makes for another wild ride.
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Investors prefer a slow, steady course of fundamental research and analysis. They’re looking for the under-valued stock prices. In this case, the value investor has done their homework and determined that the worth of a stock (its intrinsic value) is more than the current stock price. They desire the long-term satisfaction of owning an under valued stock in a company that may never bask in Wall Street’s admiration. They look for shares trading substantially below their intrinsic value.
Let’s say you decide to pass the Demon Blizzard ride and get in line for the Big Dipper. The EPS (earnings per share) is $3.46. To find its intrinsic value, you decide that 6% treasury bonds are a good comparison. So you would divide $3.46 by 0.06 and come up with $57.66.
In the recent past, greed had driven the stock price up to $85.00, but when the trend faded the price slid down to $41.00. To the value-investor this is a golden opportunity. The stock’s intrinsic value (its worth relative to the 6% government bonds) is $58, but the stock price is only $41.00! Hallelujah and the investors leave the platform on their much slower but equally gratifying ride.
Whether you’re an investor, trader, or speculator, you can take advantage of stock market price fluctuations. The important thing is to know why they are happening, and whether you should get in line or wait it out at the caramel apple stand.
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