Understanding Stock Market Behaviour

in Stock-market

Normally shares traded on stock exchanges have prices that are floating or unfixed. This is an important fact to remember when you start trading stocks and shares. The valuation of a company’s shares is recalculated every time they are bought or sold. Essentially, share prices are an expression of what traders are willing to pay for shares of the company in question.

Profit and Losses

Profits can be made on the stock market by selling your shares in a company for a higher price than they were originally bought for. Note that with modern investment products like shares spread betting you can speculate on the share price of a particular company to fall.

The challenge of stock market trading is correctly anticipating rises in share prices. With spread betting a key challenge is correctly predicting the direction of the market.

If you are trading stocks and shares then you might, for example, buy shares in a company that you believe will become more valuable, in terms of share price, within a two-year timeframe. This belief may be based on your observations of the company’s historical share price, which may have been rising steadily over time.

If you are correct and the share price continues to rise over the following two years, you should be able sell your shares for a profit. The post-tax profit will typically be the difference in value between the buying and selling price, minus stock broker fees and any taxes that are applied to your profits. If you have incorrectly anticipated a rise in the share price, and you sell at a lower price than you paid then naturally you will incur a loss.

Stock Market Behaviour

The future performance of share prices can be difficult to predict. Historical rises are not, in themselves, a foolproof guide to future performance. The wider market can also have a major effect on share prices.

Bull and bear markets are two of the best known types of stock market behaviour. A bull market refers to widespread investor optimism. This confidence is expressed in a greater willingness to buy shares at higher prices. A bull market or bullish trend in the stock market can drive share prices higher throughout a particular sector, such as the banking sector, or throughout the entire stock market. Of course, you should be careful in bull markets, there are often ‘pullbacks’ or market corrections where prices can suddenly drop.

A bear market, on the other hand, refers to widespread investor pessimism. This pessimism is expressed in a reluctance to buy shares at current prices, helping to depress prices over a period of time. As with a bull market, a bear market can affect individual sectors or the majority of a stock market.

At its heart, a stock market expresses traders’ combined sentiment. Therefore, stock market behaviour can sometimes be seen as irrational with increasing optimism or pessimism that does not appear to be based on any rational explanation. A company may have strong earnings and no indication of future losses. Even so, its shares may fall in value as investors come to believe in future losses.

This takes us to one of the most important aspects of stock market behaviour; sentiments can be self-fulfilling. A belief in future losses can translate into a falling share price, as traders pay less for the shares, which can then result in actual future share trading losses and a rational reason for trading at a reduced share price.

Spread betting is a geared form of investment, it carries a high degree of risk to your capital and can result in losses that exceed your stake. Ensure that it matches your trading needs as it might not be suitable for all investors. Before making any trades, make sure you are fully aware of the risks. Only spread bet with money you can afford to lose. Where you feel it is appropriate request independent financial advice.

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Robert Thomas has 14 articles online and 1 fans

The writer is a seasoned financial author offering strategic and tactical trading views on the financial spread betting markets.

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Understanding Stock Market Behaviour

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This article was published on 2011/02/28