Nature of Transactions on the Stock Market

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September 14, 2014

Investment Definitions




How nature of Transactions on the Stock Market looks like? When carrying out operations on the stock market, you should remember about the nature of the stock exchange transactions. It is quite important. On the stock markets, and in general in trading of securities on the capital market, “expectations” play a primary role, ie calculations with respect to the future. Therefore we can say that the subject of stock exchange transactions is the future.
On stock exchanges there are generally two groups of participants that carry out transactions. One group carry out transactions in anticipation of the declines, the second group, on the contrary, in anticipation of the price growth of certain stocks. Thus, participants on the stock exchange, or more broadly, all making the sale and purchase transactions, are divided into pessimists and optimists. If the potentials of the two groups are roughly equal, then the trade on the stock market is running smoothly, without interruption. When one group gets a distinct advantage, there is a bull or bear market phenomenon (haisse, baisse). Quotations rapidly go up or down.

How assessment of the securities’ value is done?

In the course of making money on the stock market you can use mathematical and economic formulas of assessment of the value of selected assets. But you should realize that the indicators reflect historical events, or facts that have already taken place (the amount of dividends paid, the previous courses, profits, amplitude of fluctuations). On the basis of that, you can predict the future, but with the probability of error. The analysis of investments in securities is carried out in a wide range. Indicators of values’ ratings are only a part of this analysis. In the decisions to buy or sell – a variety of data are taken into account, eg general economic outlook, industry, evaluation of management of the company. All this in addition to various time intervals. Of course, these are not all components of analyzes. And you can always make a mistake. It is difficult to talk about any so-called “rules of behavior” in the stock market. Future can’t be precisely defined with a model or description.

The issue of “speculation” deserves an explanation here. Speculation is nothing reprehensible. This is one of the motives of making transactions. Speculation can play a positive or a negative role, like the transactions that are rooted with “good” reasons. In addition, it’s worth to say about the speculations which, in principle, are a margin of operations at the stock market. The positive and negative role of speculation may revive the stock market and slow it down as well. In this way, financial speculation may affect the real economic processes.

It is worth mentioning about so-called theory of self-fulfilling expectations that operates not only in relation to the stock exchange, but to the entire economy. It comprises of the fact that if there are widespread expectations to improve stock prices and those expectations do not have to be justified, then the prices actually can start to go up. This is because the values ​​are acquired, because they are to “get more expensive,” and due to the increased demand they actually start getting more expensive. Psychological factors even on such specific markets such as stock market can’t be underestimated.
You can meet the opinion that, it is difficult to indicate something, that does not affect the stocks prices. The decisions of governments, illnesses of presidents, drought, flood, etc. are associated with the positions of markets and companies (eg. agriculture and companies of agri-food sector).

Again, however, it should be noted that it’s not good to overestimate speculative trend. Purchases of securities are simply deposits of capital, which should bring more income than bank deposits. The stock market is a market that is driven by customer orders. It is therefore difficult to avoid spontaneity.
Stock prices can sometimes significantly be different from their real values. It is believed, however, that this process can’t continue indefinitely. Quick verification of bloated stock exchange prices can cause a crash (eg. 1929 in the USA – the beginning of the Great Depression).

In the course of investing in the financial markets you can’t lose sight of the overall economy and real economic processes. Securities are a reflection of the condition of the economy. It can’t be that the financial markets are doing well and the economy is going badly. There’s a kind of linkage here.
Yet a few words about these two groups engaged in stock transactions. Traders waiting for price drop (the pessimists) are called “bears” in the stock exchange jargon. Traders expecting price increase (optimists) are called “bulls“.

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