Stock Market Price is the collective thinking of the investors about a specific stock. It is determined by the demand and supply mechanism of the same which is purely market determined. Expectations of the buyers and sellers of the relevant stock work in opposition to each other and the price mechanism helps to discover the price of the Stock.
Stock Market Price may deviate from the actual value of the company. It is a common phenomenon in the stock market that the price of a stock is exceeding its actual value.
Determination of stock market price considers that market is supreme and it discounts everything (economical, political, company specific news, etc.). 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 stock market 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 . It tries to evaluate the future trend of stock prices by using various statistical tools, charts, etc. Technical analyst s focus on the historical price movement of a stock.
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 Stock Market Prices fall more than any other weekdays.
- January Effect :- During January stock market prices generally increase more than any other month. This effect is reflected most on the small cap stock s than the mid cap s and large cap s.
Hence we can conclude as :-
- Stock Market Prices are market determined.
- Market discounts everything.
- Future expectations of the market participants helps leads to price discovery of Stocks.
- Stock Market 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.