Understanding Stock Market Dynamics: An Insight into Stock Price Variations
Stocks Ain't Got No Strings: Understanding Stock Price Movement
Yeah, don't let the folks fool ya - stocks ain't tied to their actual worth or the companies they represent. The price of a stock is simply what some dude's willing to pay some other dude to take it off his hands. That's it, baby. So, y'all want to know how the heck these prices change? Well, buckle up, buttercup! We're about to dive into the three crucial laws that rule the stock market.
Richard Wyckoff, a legend among traders and market pioneers, laid out these three bad boys: The Law of Supply and Demand, The Law of Cause and Effect, and The Law of Effort versus Result. These laws help us gauge and foresee price action up in this stock exchange.
First up: The Law of Supply and Demand
This one's all about the balance between supply (selling) and demand (buying), ya heard? If the demand exceeds the supply, prices go up like a rocket. But it ain't that simple, no siree. When the supply outweighs demand, prices start falling faster than a lead balloon. Remember, though, the number of buyers never beats out the number of sellers. Prices move until they settle where the current buyer's willing to buy from the current seller, and that's how the price is set in stone.
Next, The Law of Cause and Effect
The balance of supply and demand can shift thanks to some news, good or bad. Now, the news ain't the key player here; it's the beliefs about how that news affects future prices. If there's a perception that this news will cause the stock's price to rise, you'll see an increase in demand and, yep, you guessed it, prices go up.
Last but not least, The Law of Effort versus Result
To make a stock's price move, it takes some serious trading volume, aka effort. When the effort and the resulting price move are in sync, that trend's likely gonna continue. But if they're outta whack, well, caution's advised. Like, when there's a whole bunch of volume but price don't move much, homie, that current trend's in danger, and you better start thinkin' about some defensive moves.
Rick Redmont gives a simple example to help you understand this last law:
"Alright, let's take a look at this stock. It rings up 10,000 shares and goes up a point on the first day. [You can see they're giving some effort and getting a result.] The same happens on the second day. On the third day, it trades 20,000 shares and goes up a point again. On the fourth day, it trades 40,000 shares and jumps half a point. On the fifth day, it trades 80,000 shares but stays put. [This wave forms a cause, and the effect of thatause is demand dries up.]
"[On the third day], you had to double down on the effort to get the same result [as the first day]," Redmont points out. "The key to analyzing supply and demand is that the demand side burns itself out."
Bam! Now you know a little bit more about how these crazy stock prices climb, dive, and bob around like a rodeo in turbulence. Happy trading, champion!
Stock investing within the stock-market isn't tied to a company's actual worth, but rather the balance of supply and demand. When demand exceeds supply, prices rise due to increased buying activity, while prices decrease when supply outweighs demand.
The change in price can be influenced by the Law of Effort versus Result, where a significant trading volume (effort) may lead to a price movement (result). However, if trading volume increases but the price remains stagnant, it indicates that the demand is drying up, potentially signaling a change in the current trend.
