Today, I will discuss the principles behind the rise and fall of stock prices. We often see a stock suddenly surge, and we can't help but wonder why it has increased. What are the reasons behind it?
The core factor behind the rise and fall of stock prices is supply and demand. That is, the supply and demand for stocks. A large amount of capital chasing a relatively small number of stocks will cause the stock price to soar. A large number of stocks facing a relatively small amount of capital, the supply and demand will be out of balance, and the stock price will fall.
It can be seen that when the supply of stocks remains basically unchanged, the supply of capital is extremely important for the rise and fall of stocks. The factors determining the supply of capital are very complex. However, from the perspective of the motivation for capital inflow and outflow, it is relatively simple. We will find that the rise and fall of the stock market are mainly divided into two types:
1. The rise and fall determined by speculative capital
The inflow of this type of capital is closely related to short-term and medium-term elements such as hot spots, concepts, themes, and atmosphere. The rise and fall of stocks caused by the inflow of speculative capital generally will not last long, and will fall sharply after speculation, returning to the original starting position. For example, the speculation of the Olympic and Asian Games themes, the hot speculation of artificial intelligence, the rise caused by the market being in a bull market atmosphere, and so on.
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The rise of such stocks will not last long. The reason for this is that the foundation of its rise is not solid. The inflow of capital is due to the market's frenzied emotions, a large amount of capital chasing a relatively small number of hot plate sectors, or a large amount of capital pushing a relatively small number of stocks to rise, causing a bull market. We humans have the characteristic of losing rationality from time to time, and such impulsive performances are often staged.
The rise of such speculative stocks will generally be manifested as not matching the performance with the stock price. The rise in stock prices has greatly overdraw the company's performance in the next ten or twenty years in advance, and the market valuation has a huge bubble. Being overly optimistic about the future and giving too high a score to the company's future development.
When emotions return to rationality, the stock price will plummet. The sharp drop in stock prices will also lead to people's emotions going out of control again, entering the panic area. Because the capital continues to flow out, it becomes a situation where there are more stocks and less capital, and the stock price starts a process of falling all the way.
The stock market is engaged in this kind of hot spot speculation every day. The vast majority of people eventually lose money in the stock market because of this kind of hot spot speculation. Because the rise and fall of this stock is a game of hot potato, it is a speculative game. Everyone is facing the possibility of being trapped, including institutions.2 The Rise and Fall Determined by the Nature of Investment Capital
Many people claim that A-shares lack investment value and can only be hyped based on concepts. However, why don't they consider that companies like Yangtze Power, Luzhou Laojiao, Yili Shares, and China Merchants Bank, which are blue-chip stocks, have increased in value hundreds or even thousands of times over the past few decades? To this day, their stock prices have not fallen back to the levels of more than 20 years ago and continue to operate at high levels. Why is that?
If the prices of these stocks were driven up by market speculation, they should have fallen back to their original positions after the hype. How could the stock prices have continued to rise to hundreds or thousands of times their original value over the decades? Who is taking over these stocks that have increased by hundreds or thousands of times? What force has kept the prices of these soaring stocks from falling back?
It is the performance or the value of the company. Over the past few decades, the performance of these companies has increased by tens or even hundreds of times, and with the support of performance and value, these stocks have continued to operate at high stock prices in the long term. These stocks can be said to be worth their price. A group of rational funds that value quality over price have been chasing these high-quality stocks for decades.
The rise in stock prices is driven by the company's own value, and such stock prices are closely related to the company's fundamentals and can be predicted to a certain extent. A company that is in a leading position in the industry with core competitiveness has a higher probability of maintaining its core position and achieving excellent performance in the next five or ten years. The probability of such stocks reaching new highs in the next five or ten years is also relatively high. The market has a type of capital that will chase the stocks of these excellent companies, giving these excellent companies' stocks a corresponding reasonable price.
Therefore, it is very easy for us to analyze the nature of daily stock price fluctuations in the stock market. We just need to see whether it is driven by hot spots or performance. The sharp rise in stock prices caused by hot spots will inevitably fall sharply in the future. The rise in stock prices driven by performance has a solid foundation and is difficult to break through the support of performance.
The principle of stock price fluctuations is just like our life. Success in life obtained by relying on relationships and speculation is doomed to be short-lived, while success obtained by personal ability and talent is destined to last forever. Taking the right path, experiencing vicissitudes, being a good person, and buying the stocks of good companies is an eternal truth.
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