Share prices often go either upwards or downwards during a typical trading day on the stockmarket. This depends entirely on the prevailing emotion which is impacting that specific stock at that particular time.The cause of these movements will most probable be the emotions of either Fear or Greed.
Fear is usually rife in one or two forms.
You have the type of fear that occurs when the share price is ascending upwards. Traders become panic-stricken that they will miss out on the profits to be made.Therefore these traders will chase after the stock, which naturally only pushes the share price up further still.
Secondly there is the fear of losing money. They see the share price begin slipping, so without any fore thought they jump in and sell, thus joining the Herd’s panic selling. This only exacerbates the problem which of course makes the share price fall even quicker. Exactly what we have seen happen in the last few months.
Greed springs into life usually when the share price is heading upwards. The trader not being content with a moderate profit of 10 – 20 %, the trader will hang on and hang on desiring for larger and larger gains. Invariably the share price will fall dramatically and as always descends as twice as fast as it originally went up, if not faster.
Because of laziness or more probable inexperience the average trader has not made use of a stop loss to protect or to lock in their profits. Because of their lack of foresight or planning this ensures disastrous results and thus the cycles of Fear and greed perpetuates.
As always the natural law of “Supply and Demand” plays an significant part in the share price. If stock is scarce and hard to come by then the share price will proceed upwards. On the other side of the coin if more stock is available for sale than there are buyers then the share price will come down further so as to attract a buyer.
Usually if a share price is trailing sideways it is because the buyers and sellers are happy and content with the level at which the share price is currently sitting on. Invariably it is only good or bad news which is the cause of which will determine which direction the share price will head in the time to come.
Share prices can also be impacted by a wide range of other factors, not least what happens to the underlying company itself. Their share prices are affected by market forces and often can trade at a substantial discount to net asset value.
Bear in mind that results and share prices can be also affected by resulting raw materials shortfalls, damage to production sites and other business interruptions. In the short term, share prices are affected by market psychology as seen above.
Although no one can dependably predict the timing of bear markets, or bull markets, investors need to be knowledgeable of the extent to which share prices can decline. When positive market sentiment drives prices up, generally to levels not supported by intrinsic value, we cannot really justify investing in those overvalued shares, even if we suspect that the share prices could go up further in the short term.
One of the most clear-cut lessons to be learnt of recent years is that there is no correlation between the value of a company and its share price.This creates the possibility for individuals to make massive gains or losses.
And of course the other lesson is to be always aware of the part that fear and greed play in the market place.