What moves the markets?

Apurva Sheth
Let me begin by asking a very simple question.

What moves the markets?

It might seem very basic but let me tell you where all learning comes from - by asking basic questions.

So, what do you think moves the markets?

Why do the stock prices change so frequently when nothing appears to have changed on the ground?

Why does the price change every second, every minute and every day?

You must be considering answers like quarterly results, sales, better profits, product launch, PE or PB multiple, etc. as your reasons for this movement. But do you think that's always the case?

Often we see stock prices move lower even after so-called 'good results', or see it moving up despite 'bad results'. How does one justify such movements?

Are there any universal laws which can help us determine whether the prices of any financial security will rise or fall?

Well, we do have two principles that can guide us in this aspect.

  1. More buyers than sellers at a given price, and
  2. More enthusiasm amongst buyers than sellers

Any product, service, commodity, currency, or security that satisfies these two conditions will see its price rise.

I think it's pretty simple and none of us would doubt or question the validity of these principles.

But, how do we know whether there are more buyers than sellers and measure the extent of their enthusiasm?

A simple way to find this out is to ASK & OBSERVE.

Have you ever noticed how things happen when someone is buying groceries? A transaction begins as follows:

Lady: What is the price of this vegetable?

Shopkeeper: Rs X

Lady: Rs X is too much, I will pay only Rs 0.8 X.

Shopkeeper: Rs 0.8X doesn't work for me... You can check around with what others are offering and come back if you want it at Rs 0.95X.

Depending on the demand-supply situation the lady either accepts the offer or rejects it. In case of rejection the lady moves to another shop owner and repeats the same process until she gets the price she wants or agrees to pay the price that is asked for by the shop owners.

Observing this transaction gives us lot of insight about which side is more enthusiastic about buying or selling the goods respectively.

This gives us further indication on the direction in which prices are likely to move.

But this is possible only if buyers and sellers are limited in number. We cannot of course ask each and every participant or observe every transaction that takes place in financial markets.

Then what could be the ideal solution to this problem when tracking equities or any other asset class?

One could consider End of Day (EOD) prices when all 'fighting' has stopped.

EOD prices are the best estimate, as traders agree upon that price before taking an overnight position.

However, how does one record, remember and analyse so much of price data that is generated day-in day-out across markets.

And that's where charts come into the picture.

Drawing price charts is easier and more informative than simply writing or recording numbers. Charts show things that numbers cannot like patterns, trends, change in trends, and seasonality. For example the Nifty chart attached below shows three trends that prevailed after topping out in January 2008 i.e. downtrend till October 2008, sideways till March 2009 and uptrend till November 2010.

Nifty Price Chart showing 3 clear trends
Source: Spider Software India

The old Chinese proverb 'a picture is worth a thousand words' is best suited to describe usefulness of charts.

All throughout my journey with you I will show you how charts can add a different dimension to our trading and investment analysis. I will make sure that it is less tedious and passively even more profitable to learn and earn along with charts.

Meanwhile, here's an interesting quote on the markets that recently caught my eye: "Prices are determined more by 'the attitude of market participants' to the emerging fundamentals than by fundamentals themselves."

Do you agree with this statement? Share your views in the Club or share your comments here.

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14 Responses to "What moves the markets?"
A Chanda
28 Jul, 2016
So true about the basics that drive the buy and sell positions of the market participant - it's reassuring to find that discourse dwells upon an element of instinctive fundamentalities Like (1)
Viresh
24 Jul, 2016
Good article, any layman can understand why prices move. This is also true that Attitude of participants to emerging fundamentals more important than fundamentals itself. Like 
jkpahuja
15 May, 2016
It is the nature-character- fit rat- of the market to move in a zigzag manners because it removes the speculative elements from the valuation of instruments. This zigzag moves indicates the sentiments of mass appeal also & ultimate determines the demand supply equation. Like 
Chou HN
25 Sep, 2015
Cool. It is so true and so accurate.Like 
prabhakar sharma
02 Mar, 2015
please advice equity segmentLike (1)
s.ramanujam
10 Dec, 2014
Excellent very simple language and easy to undderstandLike 
BISWESWAR GHOSH
05 Dec, 2014
Hi Mr. Murty. I had been trying to know wherefrom do I get the figures of Volume separately for BUYERS/SELLERS. Usually all sites show the total volume during trading hours.Like (1)
Subramanian Ram
27 Nov, 2014
I wholly agree with the statement that it is the attitude of the market participants which makes the price of the underlying move. Not all the players understand the fundamentals. They do not possess adequate knowledge to interpret ratios and then make an intelligent decision. It makes sense to to beleive the chartist's point of view that everything is priced in and that major support & resistance plays a key role in triggering big price moves. Most of the international traders follow charts & hence there is also a herd mentality which is play. Good knowledge of technicals coupled with fundamentals is in my opinion the most preferred way to invest.Like 
Pramod Phadke
27 Nov, 2014
1) Closing price without reference to volume and volume-weighted-average looks meaningless to me. 2) During trading hours, number of shares proposed to buy and proposed to sell are displayed. This could possibly tell about the demand and supply. However, while booking an order, there is a part "Display Quantity". Most of the professional traders/investors use this button. Hence, actual demand and supply position can get distorted.Like (1)
Mahaaraj Singh
26 Nov, 2014
That is perectly true. My 15years of experience supports your conclusiion however;the agreegate of attitute is must to provide direction to market in long run Like 
Nirav
26 Nov, 2014
This is all good theory, but this chart is drawn with benefit of hindsight! How do you see the past chart of a day/ week/ month and predict future? Your assessment of a particular trend may reverse in a day/ week? E.g. The downtrend (with benefit of hindsight) has few upward movements as well...Similarly the uptrend (with benefit of hindsight) has few downward movements as well.. So is it not more of luck then charting, that makes money for chartists?Like 
S V RAO
26 Nov, 2014
Very well written article, that even a layman can understand. The enthusiasm or force of Demand / Supply determines the price.Like (1)
Manohar
26 Nov, 2014
My BUY or SELL decisio is based on normal things like PE, EPS,52 week H/L, views of various Market Pundits etc. But fially before I place order, I check Buyer Seller position and then take the final call.Like 
VTVR Murty
26 Nov, 2014
Excellent. However while giving the details of volume of trade, instead of giving total volume figure, should be segregated to volume of BUYERS - SELLERS. to have a clarity apart from charts. I hope it is a land mark. MurtyLike (1)
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