Source: Google Finance
Stock market is a rough indication of condition of any economy!
If stock market rises 1000 points, it is not necessarily mean that economy is going good. Likewise, if stock market declines by 1000 points, it doesn’t mean economy is going through Bad time.
Stock markets are first for earning money and trading stocks and then indicating any other thing. If you could understand these things, you will be able to know how does sentiments changes so fast in stock market!
Suppose you are holding 1,000 crore rupees worth shares of ABC company. You had invested this money at an average price of Rs 100. And currently, stock is trading around Rs 140. Means, you are earning 40 percent profit. That is great!
Now, coronavirus came in limelight all over the world and more than 1,00,000 peoples have been reported affected and more than 3,000 have died because of this virus. Every investor is fearing about what would happen if coronavirus came to India and lead to similar circumstances that China and other countries are facing today!
After several days, nightmare came true and foreigners bought coronavirus with them in India and affected other indians too because they had came in contact with these foreigners.
After this spread of coronavirus and some selling pressure which is already going on in US markets and other Oil countries markets due to sharp decline in oil prices, you know Indian market will not able to sustain at current levels and may see a good selling pressure soon!
After this, what will you do now with your 1,000 crore worth shares?
Let me give you some more details before you make any final decision.
If you start selling your shares from current levels of 140, you will be able to sell all your shares upto Rs 100 and at average price around Rs 110. Means with 10 percent profit.
There are many small investors and traders in market who follows trend as an primary indicator. So, when you will sell your shares, stock trend of ABC company will change because stock will fall to Rs 100 from 140. This decline of 40 points will lead to formation of bearish trend in stock from bullish trend.
Due to this trend reversal, many traders will exit from their long positions and many of them may also create short positions in stock. Likewise, many small investors holding equity shares may also start selling their shares causing decline in share price.
Due to your selling, stock should have come to Rs 100. But because your selling has changed the trend, and many new investors will also sell after you, stock is possible to come down close to Rs 50–60 levels.
Interestingly, many more investors will also be waiting to sell more shares once the stock sees any 5–8 percent buying from 50–60 levels.
Due to all this, you will be able to re invest your 1,000 crore rupees in ABC company within range of 50–70 rupees.
Means, the condition is as follows :–
You can sell all your shares at an average price of Rs 110 and can recover them all within range of Rs 50–70.
Now tell me what will you do after knowing this?
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If you are well prepared for if this didn’t worked or something different happens, then probably, you will execute the above strategy! Why?
Because you want to earn some extra money and by using above strategy, you can save upto rupees 40–60 per share. Right!
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When you are executing this plan, fundamentals of company are still same and doing its business as usual. Then, why share price of Company is going to move from Rs 140 to Rs 60? Because you want to earn some extra money!
Because of your will!
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Like you, many others are going to use similar strategy, who holds good money power like you!
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That is the reason why sentiment in stock market keeps changing so fast.
Condition of economy has an impact on stock market on second place.
At first, it moves according to will of those who holds good money power!
Thanks for reading
Good Luck 🙂
