Chapter 2: What makes the Markets

Chapter 2: What makes the Markets

move?
(Thing to note: What I cover in this topic is not really technical analysis, as some people will point out.
But I think it is good for every investor to have some basic knowledge on how markets move. Regardless
of whether you use technical analysis or not.)

Outline of today's lesson, we will be covering:

 Supply & demand with apples

 Applying it to the markets
 The main factors affecting S&D (positive, negative & unexpected)
 Note on the market
 Why learn how the markets move?
 To sum up this lesson

Supply & Demand with Apples

Supply and demand is basically the simplest way markets move. When demand is
larger than supply, prices go up. When supply is larger than demand, prices go down.

Think of a scenario when everyone wants apples. A

research article said that you will live 10 years longer if
you eat apples. Now you are selling apples and you have
10 apples. But suddenly there are 100 people who want
to buy your apples. 100>10, so you can sell each apple for a very high price and the
price of apples goes up.

Now imagine the research article says not to eat apples as it is found to be harmful.
Suddenly nobody wants your apples! You have 10 apples but nobody wants them. So
you keep cutting the price of each apple hoping someone will buy them, hoping that the
cheaper prices of the apples will attract people to buy them.

This is basically what supply and demand is.

Applying it to the markets

When there are more buyers than sellers, the price of a

stock will go up. This is also called a bull market as the
participants are all optimistic and bullish about the market.

When the sellers outnumber the buyers, prices go down.

This is called a bear market as the participants are all
pessimistic about the market.

The main factors affecting S&D are

 Outlook of the company
 Outlook of the economy
A positive outlook will bring investors and stock prices will rise as the company or
economy is growing.

A negative outlook will lose investors and stock prices will fall as the company or
economy is shrinking.
Note that the price of a stock will make a huge jump on UNEXPECTED news. This
news can be bullish (positive) or bearish (negative).

Let's look at some examples illustrating positive, negative outlooks and how
unexpected news can affect a company.

Positive outlook about a company

In general, people purchase a stock when they feel that the stock will rise in the future.
This could be due to a variety of reasons such as when a company just launched a new
product which is selling very well (Apple and their IPhone). This is a case
of demand being larger than supply, so the price of the company goes up.

Screenshot from SG Yahoo Finance

Positive unexpected news

You will find that stock prices rise very quickly on UNEXPECTED positive news in the
market as well. When a product is doing better than expected (Pokémon Go), the chart
of the stock will quickly show it.

Screenshot from SG Yahoo Finance

Negative outlook for the company

When a company outlook is bleak, growth is slow or it is getting overtaken by its

competitors. The stock price of that company will fall over time.

A good example of such a company is Twitter. They have fierce competition from
Facebook, Instagram and Snapchat on the social media platforms. Their growth has
been slow and they have not been able to capture much of the social media market
share so their earnings are flat. This coupled with a lack of new and innovative features
on Twitter leads to a bleak outlook for the company.

Screenshot from SG Yahoo Finance

Negative unexpected news

People tend to sell a stock when they feel that the company has been affected by bad
news. For example, if a company is currently facing the possibility of a lawsuit or caught
in a scandal (Wells Fargo), the share price will fall. The drop in price is also immediate
and sharp on UNEXPECTED negative news.
 Screenshot from SG Yahoo Finance

Note on the market

 Most of the economies in the world are linked by trade and other factors so you will
note that negative news in other countries also has the ability to influence markets.
One good example is the China stock market crash of 2015.
 Sometimes the market would "priced in" certain moves. This means the market
would react to a possible event as if it were true. For example, if we know that the
government has indicated that it would spend a lot on infrastructure. The stock price
of most infrastructure companies will rise.
Why learn how the markets move?
I think it's good to understand the basic reason why the price of a stock moves and how
the positive or negative outlook of a stock can affect its supply and demand.

Quick sharing from me

Here is something I personally use to gauge roughly how the market participants are
feeling. You can go to CNN Money and they have an indicator to show how the market
participants are feeling. Just go to their Markets tab and click on Fear & Greed.

Screenshot from CNN Money website

To sum up this lesson
 Supply and demand is the basic factor driving the market
 It is influenced by news regarding the company outlook and economic outlook
 A positive outlook will bring investors and prices will rise
 A negative outlook will lose investors and prices will fall
 Unexpected news usually causes a big jump in price
 Sometimes the market would "priced in" certain news

In Technical Analysis we believe that the all the information we need to analyze a stock,
is present in the chart because the reactions from any local or global events will be
shown in the charts as market participants would have reacted immediately the moment
they saw the news.