Stock prices often rise or fall during a typical stock market trading day. This entirely depends on the prevailing emotion that is impacting that specific action at that particular moment.
Fear often abounds in one of two forms.
You have the kind of fear that happens when the stock price goes up. Traders panic that they will miss out on any profits to be made, therefore these traders will chase the stock, which naturally only pushes the stock price even higher.
Second, there is the fear of losing money. They see the stock price start to drop, so without thinking beforehand they jump in and sell, thus joining The Herd’s panic sale. This only exacerbates the problem which of course causes the stock price to drop even faster. Exactly what we have seen happen in recent months.
Greed usually comes to life when stock prices rise. The trader is not content with a modest 10 – 20% profit, the trader will wait and wait wishing for bigger and bigger profits. Invariably, the stock price will fall sharply and, as always, it falls twice as fast as it originally rose, if not faster.
Due to laziness or, more likely, inexperience, the average trader has not used a stop loss to protect or secure their profits. Due to their lack of foresight or planning, this ensures disastrous results and thus cycles of fear and greed are perpetuated.
As always, the natural law of “supply and demand” plays an important role in the price of shares. If shares are scarce and hard to come by, the share price will go up. On the other side of the coin, if there are more shares available for sale than there are buyers, the share price will drop further to attract a buyer.
Usually, if a stock price is falling sideways, it is because buyers and sellers are happy and satisfied with where the stock price is currently. Invariably, only good or bad news will determine which way the stock price will head in the future.
Share prices can also be affected by a wide range of other factors, including what happens to the underlying company itself. Their share prices are affected by market forces and can often trade at a substantial discount to net asset value.
Please note that results and share prices may also be affected by resulting raw material shortages, damage to production sites and other business interruptions. In the short term, stock prices are affected by market psychology, as seen above.
Although no one can reliably predict the timing of bear or bull markets, investors need to be aware of how far stock prices may fall. When positive market sentiment drives prices higher, usually to levels that are not supported by intrinsic value, we can’t really justify investing in those overvalued stocks, even if we suspect that stock prices could go even higher in the short term.
One of the clearest lessons of recent years is that there is no correlation between the value of a company and its share price, which creates the potential for people to make massive profits or losses.
And of course the other lesson is to always be aware of the role that fear and greed play in the market.