As spectators of the market, we see a roller coaster ride of prices all year round. What triggers this phenomenon to happen? Most investors who are asked with this question would probably not know the answer. Who really controls the market? Let’s find out as we read this article further.
Who controls the market?
Contrary to what most people believe, the market is not simply controlled or manipulated by large, powerful organizations. There are two entities that actually play the biggest roles in the market – buyers and sellers. Yes, they are composed of seemingly insignificant individual investors, companies, financial managers, etc.
How do they control the market?
We can compare this scenario to a game of tug of war, with the buyers on one side, and the sellers on the other side. Whoever wins the war would be in control of the market price.
Another way to view this is by looking at the supply and demand. If demand is greater than the supply, then the sellers gain control. On the other hand, if the supply exceeds the demand, then the buyers become in control.
How is it exactly? Here is a realistic scenario:
Both sides have their own goals for their investments. Buyers aim to buy at the lowest price, while sellers aim to sell at the highest price possible. The current price of a stock is determined by looking at the previously traded price. For example, if a stock has been previously traded at $500, then that would be the basis for the next price.
As a buyer, you would want to buy at a price lower than $500. Meanwhile, a seller would want to sell it at a price higher than $500. If the two parties have opposing interests, they would need to make a compromise. Whoever gives in to the other loses, and that’s how market prices are determined. The compromises made on daily trades make up the reason for market price fluctuation.
The role of market sentiment
Buyers and sellers don’t simply enter and exit the market whenever they want. The reason why trades happen is because of what we call market sentiment. The market is controlled by human beings, who are people who act with sentiment. These sentiments are governed by different factors: market news, natural disasters, economic updates, etc. How the people react to these factors would affect how they would act in the market.
For example, if a certain company declares a huge drop on their earnings report, there is a huge chance that investors would sell their stocks because of fear that the company may not be able to snap back. This would increase supply with fairly less demand, thus resulting in a lower price in the market.
Now that the truth is clear, do not be alarmed whenever you read or hear stories that say the market suddenly rallied or fell. That is not an effect of a powerful entity that plans to control the prices to their likes. It is still on our hands on how the market will strive. Your role is to play with the trend and know how to make every turns go to your advantage.
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