Economics of Stock Market
Stock Market is not a Rocket Science!!!
It is just a logical flow of activities which
anyone can understand
In this post we are going to learn about
how simple Economics works in stock market and Price & Volume, 2 simple
factors run the whole market
When I was in junior college , I studied
Economics for the first time ,from then till date I am learning it . I used to
hate it because of graphs , typical theories and so on. But now after learning
Accountancy, Finance I understand how Economics is important
Let us understand stock market mechanism
with Economics
Forget stock market for 2 mins and take
our daily life example
Its 9pm in the
evening, you reach out to the vegetable market. You know that vegetable price
viz around Rs.40. Vegetable is a perishable item and hence the seller also want
to clear the stock by End of the day. You start bargaining with seller, if
someone not agrees with your price, you shift to other one. Here, you can
switch to other sellers because they are in large numbers and you belong
category who is in small in numbers hence you have good Bargaining Power.
The transaction may get executed at Rs.30-35,less than your psychological price
In contrast if
you go in the market in festival season where seller can be same number as above
but buyers are in large number. Hence, the momentum shifts to seller side; now
bargaining won’t happen as seller dictates the price & you have to accept
it!
Above real life examples gives us
following learning
·
(No.)
Buyers < Sellers – Buyer will
negotiate more – Seller has to accept at lower price -Fall in
Price – if situation continues Further Fall in Price.
·
(No.)
Buyers > Sellers – Buyer won’t
negotiate – Buyer has to accept
at given / higher price -Increase in Price – if situation continues Further
Increase in Price.
Now let’s apply this in Stock Market

This
is the data of State Bank of India as on 25th March
189.7 is the current trading price on the
given stock exchange (written next to the stock name)
Price movement is always calculated on Opening
Price
Bid Price – Price at which Buyer is ready
to buy (If you are confuse in these technical terms remember B for Buyer and
B for Bid Price)
Ask
Price - Price at which Sell is ready to sell
If
you closely observe above chart, Bid Prices are slightly low than Ask price;
This gives us an important thumb rule, though it is stock market or real
life
1. Buyer will always Buy / try to buy at the
least price available
2. Seller will always Sell / try to sell at
the best / highest price available
In
the above chart , Second last line from the bottom shows Total Buying &
Selling Quantity at particular level , now in the above case Bid Q is higher
i.e. Demand is more than Supply hence it will push the price up (Volume –
Quantity is one of the indicator for price determination)
How to know the Volume ???

The
above image is divided in 3 parts ,First is typical candle chart of the
selected time frame 10 Mins in this case
, each candle represent movement in 10Mins
Green Line graph is the Positive Volume
Index – Buyers volume
Red
Line graph is the Negative Volume Index – Sellers Volume
Through
quick glance we get to know that Buyers volume is at peak and Sellers volume is
at minimum level . You are wise now to know the interpretation of this !!
Demand
& Supply relation is very helpful to make complicated things very simple !
That’s
it for today !
Stay
Home , Stay Safe !!!
Prathamesh
(27 March 2020)
Comments
India needs to increase financial literacy and I appreciate your contribution for it.