Share Prices are the prices of the shares of companies concerned in the secondary market. Share price of a company is determined by the demand and supply mechanism of the same. It is thus purely market determined. Expectations of the buyers and sellers of the relevant share work in opposition to each other and the price mechanism helps to discover the price of the share.
Share market is the market for securities where organized issuance and trading of shares takes place either through exchanges or over-the-counter in electronic or physical form.
Determination of share price considers that market is supreme and it discounts everything (economical, political and all related factors). It presumes that all the investors behave rationally and the value of the asset is estimated based on future expectations. Hence, with every new information, the future expectation of the market is liable to change and consequently the share prices . As the new information is erratic in nature so it influences the price in a random way.
But empirical evidences show that prices do follow a trend. In the short term, the serial correlation is low but it increases with the time interval. ie. In the long run, prices show stronger correlation. This correlation of prices during a time period has given rise to a analytical school known as Technical Analysis .
Some of the common empirical evidences regarding stock prices are :-
Monday Syndrome :-It has been observed in almost all the stock exchanges all over the world that on Mondays the share prices fall more than any other weekdays.
January Effect :- During January share prices generally increase more than any other month. This effect is reflected most on the small cap stocks than the mid and large caps.
There are basically two types of persons who invest in the share market who help the market in price discovery of the share :-
They enter and exit out of the market like the thief in the night. Traders continuously have a watch on the market during the trading hours and the moment they see any opportunity arising they pounce on it for scalping the profit out. These type of trading generally are risky in nature.
Portfolio Managers are actually investors who buy or sell securities for holding purposes with a view of medium and long term perspective. They basically rely on efficient fundamental analysis of the stock they are taking position on.
In share market, in order to speculate investors and traders generally rely on the following analyses :-
This looks into any type of relevant data (cash flow, return on assets, history of profits, etc.) associated with the company which could have an effect on the value and price of the stock. It tries to measure the intrinsic value of a company's stock.
Technical analysis tries to evaluate the future trend of stock prices by using various statistical tools, charts, etc. Technical analysts focus on the historical price movement of a stock.
Portfolio Managers generally rely on the Fundamental Analysis for forecasting the price of a share. On the other hand, the intra-day or scalp traders and swing-traders generally follow the technical analysis of the market.
Hence to sum up :-
- Share Prices are market determined.
- Market discounts everything.
- Future expectations of the market participants helps leads to price discovery of shares.
- Share prices move randomly.
- Technical analysis helps the traders to find out a correlation in the apparent price movements.
- Fundamental analysis looks into any type of relevant data (cash flow, return on assets, history of profits, etc.) associated with the company which could have an effect on the value and price of the stock.