Behavior of the Stock Market

The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the investors. So, over- reactions and wrong speculation can give rise to irrational behavior of the Stock Market. Excessive optimistic speculation of future prospects can raise the prices of stocks to an extreme high and excessive pessimism on the part of the investors can result in extremely low prices. Stock Market behavior is also affected by the psychology of “Group Thinking”. The thinking of a majority group of people many times influences others to think in the same line and the Stock Market behavior gets naturally affected.

Sometimes the Stock Market behavior is affected by rumors and mass panic. The prices of the stocks fluctuate tremendously by the economic use even if it has nothing to do with values of stocks and securities.

So, it is extremely difficult to make predictions about the Stock Market and the inexperienced investors who are not that much interested in financial analysis of stocks; rarely get the financial assistance from the Stock Market at the time of need.

Your shares have advanced, good! A cause for prudent concern

A substantial rise in the market is at once a legitimate reason for satisfaction and a cause for prudent concern, but it may also bring a strong temptation toward imprudent action.


Your shares have advanced, good! You are richer than you were, good!

•But has the price risen too high, and should you think of selling?


•Or should you kick yourself for not having bought more shares when the level was lower?


•Or - worst thought of all - should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments?

Presented thus in print, the answer to the last question is a self-evident NO, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.

It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favour some kind of mechanical method for varying the proportion of bonds to stocks in the investor's portfolio. The chief advantage, perhaps, is that such a formula will give him something to do.

As the market advances, he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure.


(For today's investor, the ideal strategy for pursuing this formula is rebalancing)

http://myinvestingnotes.blogspot.com/2008/10/market-fluctuations-of-investors.html

Market Price Fluctuations

52W Hg 32.000
52W Lw 26.000
Close 32.000

Price fluctuations:
The share price showed a steady up-trend with little volatility.
At 32.00, the share price has risen 23.1% from the 52 week low price.





52W Hg 12.400
52W Lw 8.100
Close 11.300

Price fluctuations:
The share price dropped 34.7% from its 52 week high price.
At 11.30, the share price has risen 39.5% from the 52 week low price.




52W Hg 6.250
52W Lw 4.460
Close 6.200

Price fluctuations:
The share price rose steadily with some volatility to its present price which is also the 52 week high price.
At 6.20, the share price has risen 39% from the 52 week low price.





52W Hg 1.320
52W Lw 0.800
Close 1.200

Price fluctuations:
The share price dropped 39% from its 52 week high price.
At 1.20, the share price has risen 50% from the 52 week low price.

52W Hg 2.380
52W Lw 0.790
Close 1.840

Price fluctuations
The share price dropped 67% from its 52 week high price.
At 1.84, the share price has risen 133% from the 52 week low price.

How can a short-term investor profits from these market price fluctuations?

How can a long-term investor profits from these market price fluctuations?

Who gains more: those who bought and hold long term or those who sold when the market trended downwards and then bought back when the market trended upwards?

The latter group needed to get both the sell and decision correct. Some in this latter group were caught with little allocation to stocks when the market turned in March, missing the best upward returns offered by this severe bear market.

Make volatility your friend.

For an investor who will be putting in more new capital yearly into the market, an understanding of market price fluctuations is important.

It is to be expected that the price of a stock can goes down by a third and can goes up by a half, even in normal market situations.

In fact, when the market is being sold down, the long term value investor gets excited and enthused.

The risk is not in the price volatility.

• The risk is in oneself, reacting "stupidly" to price fluctuations.
• The other risk of course is making a wrong assessment of the future earnings and future earnings growth of the business of the company you bought.

The Investor and Market Fluctuations

The investors in these assets need not take market fluctuations into account.

1. To the extent that the investor’s funds placed in high-grade bonds of relatively short maturity – say, of seven years or less – will not be affected significantly by changes in market prices, and need not take them into account.
2. This applies also to his holdings of US savings bonds, which he can always turn in at his cost price or more.

The investors in these assets need to take market fluctuations into account.

1. His longer-term bonds may have relatively wide price swings during their lifetimes, and
2. his common-stock portfolio is almost certain to fluctuate in value over any period of several years.
3. The investor should know about these possibilities and should be prepared for them both financially and psychologically.
4. He will want to benefit from changes in market levels –

• certainly through an advance in the value of his stock holdings as time goes on, and
• perhaps also by making purchases and sales at advantageous prices.
• This interest on his part is inevitable, and legitimate enough. But it involves the very real danger that it will lead him into speculative attitudes and activities.
• It is easy for us to tell you not to speculate; the hard thing will be for you to follow this advice.

Let us repeat what we said at the outset: If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.

Ref: Intelligent Investor by Benjamin Graham

Three Main Influences on Stock Prices

Three Main Influences on Stock Prices
By Ken Little, About.com

There are three main areas of influence that move a stock’s price up or down. If you understand these influences, it will help you decide whether the price movement is a buy, sell or sit tight signal.

Fundamentals

Clearly, the most direct influence on a stock’s price is a change in the economic fundamentals of the business.

If revenues and profits are on a steep upward trend with no indication of leveling off, you can expect to see the stock price rise as investors bid up this attractive company.

On the other hand, if the profit picture is flat or, worse, declining with no change in sight, look for investors to abandon the stock and the price to fall.

These are simple examples of changes in fundamentals. Other, more complex and subtle changes can occur that may not dramatically affect the stock price immediately (increased debt, a poor acquisition and so on can also trigger price changes).

The point is that changes in the underlying business have a direct impact on the stock’s price. Smart investors spot the subtle changes before they become price-movers and take the appropriate action.

Sector Changes

Changes in the stock’s sector can have positive or negative affects on price too. Some sectors or industries are cyclical in nature and you should know that would affect price.

However, when whole sectors catch of fire (think dot.com stocks) or burn up (think dot.com stocks, again), even those companies that have solid fundamentals are pulled along with the rest of the sector.

You may hold a stock that is a victim of “guilt by association” when an industry falls out of favor. Likewise, stocks can see prices artificially inflated if they find themselves in the right industry at the right time.

Market Swings

The market goes up and the market goes down. That’s about all you can say with certainty concerning the stock market.

As the market moves up and down, your stock may move with or against it. Most large-cap stocks will follow the market to some degree, but smaller companies may not get the same push every time.

In general, a strong market move either up or down will carry more stocks with it than not, so your stock may be up or down for no other reason than the market was up or down.

Conclusion

How do you use this information?

A change in fundamentals may be an opportunity to buy more shares of a growing company or it may signal the time to sell if the changes are for the worse.

A change in the sector is usually temporary so most long-term investors will ride out dips due to these factors. However, if something drastically changes in the stock’s industry due to regulation or a new technology, for example, you may want to reevaluate your position. Is the company capable of adapting or do you own a dinosaur?

Market swings that move your stock’s price can be opportunities to buy additional shares (assuming all the company’s fundamentals still checkout). If the rising market pushes up your stock’s price, it may be time to take a profit on part of your holdings and wait for the price to come back down to earth to reinvest.

http://stocks.about.com/od/evaluatingstocks/a/0317threefact.htm

Market Fluctuations as a Guide to Investment Decisions

What does the past record promises the investor - in either:

• the form of long-term appreciation of a portfolio held relatively unchanged through successive rises and declines, or,
• in the possibilities of buying near bear-market lows and selling not too far below bull-market highs.

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.

There are two possible ways by which he may try to do this:

• the way of timing and
• the way of pricing.

By timing we mean the endeavor to anticipate the action of the stock market - to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward.

By pricing, we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.

A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.



We are convinced that the intelligent investor can derive satisfactory results from pricing of either type.

We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results.

This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street.

As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts.

Pretensions of stock-market forecasting or timing.

The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why?

Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than this own.

*

A great deal of brain power goes into this field and undoubtedly some people can make money by being good stock market analysts.

But it is absurd to think that the general public can ever make money out of market forecasts.

For who will buy when the general public, at a given signal, rushes to sell out at a profit?

If you, the reader, expect to get rich over the yers by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market.

There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.

Timing is of Psychological importance to the speculator

There is one aspect of the "timing" philosophy which seems to have escaped everyone's notice.

Timing is of great psychological importance to the speculators because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him.

But a waiting period, as such, is of no consequence to the investor.

What advantage is there to him in having his money uninveted until he receives some (presumably) trustworthy signal that the time has come to buy?

He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income.

What this means is that timing is of no real value to the investor unless it coincides with pricing - that is, unless it enables him to repurchase his shares at substantially under his previous selling price.

Ref: Intelligent Investor by Benjamin Graham