Q1 Who is driving stock markets?
Topic: Who is driving stock markets?
- Please read the following articles for Question 1:
- Do fundamentals or emotions drive the stock market?
- Don’t blame stock markets for peril of short-termism.
Question 1: After reading the above articles 1 and 2, who do you think is driving markets – short-term or long-term investors?
Discussion 1 Q1
Who is driving the stock markets?
As per the reports from NASDAQ on 8th February 2022, “Down 50% off highs, Shopify Stocks looks cheap”, “Peloton Interactive Inc. – Class A Shares close the day 20.9% Higher”. Also, the above-embedded chart is from the NASDAQ website. After reading these statements made by the National Association of Securities Dealers Automated Quotations or as it is known NASDAQ, we must be thinking of the question like why are some stock prices rising and what is the reason behind some stocks falling, or who is driving the stock markets-is it the investors or the market sentiments or what else is affecting the markets to fall or rise.
The answer to this question is not limited just to the investors. The determination of stocks is done in the marketplace where the buyers meet the sellers. Many factors affect the stock markets. The first one can be the fundamental factors like EPS, P/E ratio, etc. The second factor is the technical factors like Inflation and Deflation, substitutes available in the market, competitors’ market strength, News, Investors’ Demographics, etc. The last one can be the market sentiment where we talk of behavioral finance.
Moving on to the effect caused by the long-term and short-term investors, the optimistic or pessimistic attitude of the investor about future productivity growth is a very important factor affecting the market behavior patterns. Long-term investors are the ones who have hold of their stocks for a longer period. They have good accessibility of the information of the listed companies, they are trading in. They are considered informed traders and they use their knowledge skills in estimating the real value of the listed companies. The accuracy of the information they have about the companies is very high as they are trading with the companies for a longer period and they have access to the companies’ financial statements to analyze their annual/quarterly reports.
On the other hand, short-term investors are those who hold their stocks for a very shorter period. Thus, they don’t have a deeper knowledge of the listed companies. They are called the noise traders in the market. They are intended to purchase a stock whose price is low and will sell it when the price is high to earn a spread return on their investment (Hindawi.com, 2020). They don’t have completely accurate information about the company and hence, therefore they cannot evaluate an accurate report on the present market situation of any company. Also, the herd behavior of investors is a common aspect of the stock market where institutional investors rush out in buying or selling a particular stock at the same time leading to a rise or fall in the stock value. The prices of the stock are generally seen to get inflated when the investors have a positive belief in the growth aspects or the share performance in the future and vice versa (Bouteska & Regaieg, 2018).
Bouteska, A., & Regaieg, B. (2018). Loss aversion, the overconfidence of investors, and their impact on market performance are evidenced by the US stock markets. Journal of Economics, Finance, and Administrative Science.
Hindawi.com (2020) the influence of long-term and short-term institutional investors on complicated pricing of stocks. Retrieved from: https://www.hindawi.com/journals/complexity/2020/8833180/ [Retrieved on 8th February 2022]