Stock market moves up and down in a “random” manner as if it has a mind of its own. Trying to make sense of those shifts might seem difficult, but closer examination reveals that definite forces shape the changes. No doubt there are some literatures out there describing the chaotic movement of the share prices and explained that the movements are random and unpredictable. This will not be covered in this material as I believe the stock market is mapping the human behaviours which follow certain trends and pattern.

Talking about factors which affect the price movements, there are 2 major ways of looking at it. The conventional ways describe that price movements are directly linked to the following factors:

Conventional Factor I: Supply and demand

There’s an old saying that a share is only worth what somebody is willing to pay for it. And that’s true - buyers determine the price of a share. As investors gain new information, they decide how much they are willing to pay more for a share. Their changing perceptions cause share prices to rise or fall. The price of a share is no different to any other product or service. It is determined by supply and demand.

Conventional Factor II: Company’s Financial Health

If you are buying a certain share, you are considered as one of the owner of the company. As an business investor, you would naturally judge a company by its current performance, business management and its future prospect. A set of formulas and rules have been laid out to gauge the financial health of an organization. This is called fundamental analysis. If you are looking forward to participate in the business by buying the share, this is the direction you would be heading towards. However if you are a short term investor and your objective of investing in shares in to profit from the price difference, the fundamental analysis is not suitable. This is because the stock price does not entirely based on the company’s financial well being, but also other factors that are described here.

Conventional Factor III: Industry’s Financial Health

A company’s share price may go up or down depending on whether investors think that its industry sector as a whole is about to expand or contract. It is well recognized that many industries expand and contract in cycles. For example, the construction industry is cyclical and very dependant on total economy well being. Even if a particular building company may be doing well financially, and have plenty of orders on its books, if the construction industry in general is declining, for example when interest rates rise, inflation rises and economy is going downtrend, investors might question the company’s ability to keep growing. In that case, the company’s share price may fall.

Conventional Factor IV: Economy Health

This is a common sense. When the economy is good, the stock market will usually in its Bull Era. Most share prices will move up as most of the sectors are performing. Some of the key indicator if economy health is the GDP, interest rate, inflation rate and currency rate.

UNCONVENTIONAL FACTOR: SMART MONEY

Other than these conventional factors that influence the share prices, one main force that shift the market is the “Smart Money” (also known as market makers). Smart money is referring to the syndicate traders who manipulate the market for their own profit. These group of traders have very strong financial support and they are able to use various methods (including using the psychology of the public traders) to shift the prices up and down. More than often, they know the insider news earlier than the public(in fact some of the news are released by them) and using the news to trap the public into a weak position. Knowing the weak traders are usually dominate by fear and greed, they setup the market to trap them. No exchange will ever admit that the market is manipulated, but the truth is most of the exchanges are. If you could understand the price and volume reactions, you will be able to understand how the “Smart Money” operate. This is the reason why the market is not random. The market is heavily manipulated and in order the survive, you will need to know the manipulation.

Having said that, it does not mean that the market is not affected by the conventional factors. In fact it does. But one must also recognize the presence of the “Smart Money” and trade in harmony with them.

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