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

Unknown said…
Keep posting πŸ‘ good attempt.
India needs to increase financial literacy and I appreciate your contribution for it.
Prathamesh said…
Thank you so much , your appreciation is encouraging us to work hard .
Shreya said…
Very informative and easy to follow

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