Every broker, investor, analyst and outside observer will have a different view of stock markets, sectors and individual companies. In order to accommodate every buyer there must be a seller, and vice versa. Whether you overcomplicate or oversimplify the way in which stock markets operate, one thing is clear, they are driven on information which then creates supply and demand. So how does this work?
In the words of Benjamin Disraeli:-
“As a rule, he or she who has the most information will have the greatest success in life.”
How do stock markets work?
While stock-market headlines are dominated by price movements, this is the end result of a fairly basic concept. Think of stock markets as information exchanges. Positive, neutral and negative information/views are drawn into this huge machine, causing prices to be pulled in different directions. The actual net price movement you see is the net result of a huge range of information, expectations and opinions. Is this oversimplification?
Does the market always know best?
Some people believe that stock markets look nine months in advance while others live on a day-to-day basis. What we do know is that short-term concerns can very often override medium to long-term positive prospects. There is a common saying in investment circles:-
“The market always knows best.”
As an individual investor, you will never know what is going on behind-the-scenes or the views of analysts and experts until they are made public. At the same time all of this information, together with public information, is slowly trickling into stock markets, influencing short, medium and long-term prices. Therefore, it makes sense to listen to markets, follow the trend and reconsider your position atturning points.
You may need to ride a degree of short-term volatility; this may test your nerve and your determination to go with the trend. This isn’t easy!
Should we factor in human emotions?
The analysis of data is based on cold hard facts while the movement of share prices can be heavily influenced by human emotions. Time and time again we see investors overreacting on the upside and overreacting on the downside. Focusing on short-term issues, positive and negative shocks, can lead to wider fluctuations and trading opportunities.
As we have mentioned before, this is akin to an elastic band being stretched towards its limit. Once you release the pressure, it will spring back to a more realistic length. This is what we see with share prices every day, oversold and overbought positions very quickly overturned by short-term traders. While day traders are often very alert to these oversold/overbought positions, are they really trading on human emotions?
Fear and greed are powerful short-term emotions
If you can harness such emotions as fear and greed, focus on market overreactions and bank numerous short-term returns, you have the mindset of a day trader/technical trader. There is a skill, perhaps enhanced with experience, in stripping emotion out of your investment decisions and dealing in cold hard facts. This also includes the ability to put your hands in the air, and admit you got it wrong. Take a loss, take your medicine, learn from it and move on.
The ability to “see the woods for the trees” may again be seen by many as an oversimplification, but think about it. How many times have you been influenced by short-term price movements and missed the long-term returns?
Small margins
Depending on the degree of volatility, oversold and overbought positions, day traders tend to deal on relatively small margins. As a consequence, it is important to maintain a competitive charging structure together with a reliable dealing platform. We appreciate this concept at Global Investment Strategy UK, constantly striving to enhance our services within a competitive charging framework.