Stock Market Behaviors
Stock market behaviors discuss what make stock
prices go up and down from company fundamental factors, supply and
demand on securities available on market and speculator and investor
perspective. It also discuss the Ben Graham's Mr. Market concept.
What Makes Stock Prices Go Up and Down?
1.
Company Fundamental
An analysis
and study on stock prices movement correlate to company fundamental
such as EVA, EPS growth, Sale growth are shown in the following
table. For example, if a company ROE increase by 35%, statistically,
the market value will be increase by 35% and the rest of the factors
that affecting the stock prices are speculators, supply and demand
and market sentiment etc...
|
Correlations
between market value & various measures |
|
1. EVA |
50% |
|
2.
ROE |
35% |
|
3 Cash flow growth |
22% |
|
4
EPS growth |
18% |
|
5
Dividend growth |
16% |
|
6
Sales growth |
9% |
2.
Speculators and
Investors
The
stock prices will drive by speculator to one extremes, the investor who
generally buys when the speculator sells and sells when the
speculator buys. If all the buyers in stock market are investors,
the stock market would behave much more
rationally and the stock prices will reflect the underlying value of
the companies in the long run. In other words, stocks would be bought and sold based
on the company value.
3.
Supply and Demand
Stocks like other commodity such as oil
are following supply and demand principle. There are only same number of stocks
available at any given time, more buys than seller will drive the
price of these shares up and vice versa. When the supply of shares
is more the the demand, these shares are worth less. These shares
will worth more if the demand is more than the supply of these
particular shares.
4.
Market Overreact
These are the opportunities when great
businesses or company runs into short term financial difficulty such
as when a company wants to build a new manufacturing plant or a
wealthy individual selling his stock for an financial reason. Wall
Street overreacts and driven down the stock price to unjustifiable
lows. If you understand this, it is time to accumulate those company
stock with cheap price because eventually the company stock will go
back to it value and making profit from it.
Stock market behaviors