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Sunday, 17 January 2010

Understanding stock movements - Part 2

Understanding stock movements

The stock price movement is still primarily determined by the Law Of Demand and Supply:
  • More willing buyers and less willing sellers will cause the stock price to move up.
  • More willing sellers and less willing buyers, the stock price has to come down.
The Supply is finite and limited and will have a stronger influence over stock price movement so we definitely have to watch the Supply side more closely.

Any Increase In Supply

Sometime when a company announces an increase in supply of shares through different methods to raise capital; its stock price will plunge as the market fears on the expectations of more and more willing sellers coming on board in the short term.

But, sometime, instead of plunging, the stock price quickly moves up. Why? Because the market believe the new buyers are long term, savvy investors and their actions will cause more willing buyers to follow them.

The daily stock price movement has very little to do with the fundamental and valuation of the underlying company and more likely to follow the Law Of Supply and Demand.

If there is any changes or potential changes in a company fundamental, its stock price will be quickly price in by the market participants; and thereafter its stock price movement will just follow the Law of Supply and Demand.

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