Stock Market Truths To Understand (1)

The stock market has systems, various participants, a myriad of strategies and tips coming from diverse angles. These truths should guide your dealings and reaction to things in the market.

The stock market is a community of its own. In this community, there are processes and systems that exist to guide how things work. There are buyers and sellers within this community and there are rules that apply.

In order for you to thrive in a community as these, you must be able to know how things work. You must have the right mindset and you must know the things to believe as gospel truth and the ones that are just rumours.

In the same vein, the stock market has systems, various participants, a myriad of strategies and tips coming from diverse angles, and so much more. To be able to meet all your objectives for being in the market in the first place, you must understand certain truths and have them shape your mindset as you operate within the market.

Towards having a clear mental picture of specific dealings, here are some truths of the stock market you should understand. Note that the first two points are related and the last 2 points are also related.

Things Will Always Return To Normal

The stock market functions something like how a boomerang works. No matter how far you toss it in any direction, it will always return home. It is no news now that the stock market can be extremely volatile.

This volatility comes with extreme price movements that could swing in any direction. However, a truth of this market is that it always returns to the normal valuation levels.

In other words, prices will always go back to where they came from. This is logical because at every point in time, the market is either trading at a lower price than its real value, a higher price than its real value or at par.

So as opposed to moving with the changing and unsustainable/unstable price, it is important to stick to the investment plan that had you purchasing the stock in the first place. Don’t get caught up in the noise, the drama, or the chaos of the stock market.

The Good Times Don’t Always Last

If it looks too good to be true, it probably is. Following closely from the first point, it is also important not to get overly excited about your wins in the stock market.

Even though we believe that things will eventually return to the mean point, it is natural to start building expectations around a bullish period. Even when the company is growing as your best case scenario, understand that your gains just cannot be limitless – at least not in the short to medium term.

The truth is that nothing last forever and in the financial space, this is even truer. It is important that you don’t count your chickens before they get hatched.

Public Information Trends Are Not As Efficient As You Think

Efficient market hypothesis tries to help us see the sensitivity of information in the stock market. The idea is to discover the speed with which any financial or economic information ignites a reaction.

The reality, however, is that there is a period between when people know about information and when you finally get to see it on the news. Also understand that the market thrives on herd movement and this is the exact thing that causes the market to reverse against itself.

For example, if the price of a stock is low and many people rush to buy it, the new demand might force people the price to go up - which might make the people who bought it cheap to want to sell for quick gains. It just keeps going round. This is what this truth is about.

By the time you read news or obtain information relating to the stock market, the entire process might have already gone full circle! If the information led people to purchase more shares, many people will already have done so before the information gets to you, so much so that the trend might now already be going the other way around. The lesson is that moving with the herd will most probably not help you.

Be Wary of Forecasts

Following closely from the last point as well, it is important that you cherry pick the kind of information you allow. As a result of the herd mentality movements, forecasts and experts analysis can be misleading – simply because they tend to enforce herd reaction.

When everybody wants to buy, there’ll be no buyers left and vice versa. Many times, these forecasts are the very things that cause the predictions they make. They are ultimately not as dependable as your analysis of the stock and the industry with which it performs in.

In our next article, we’ll tackle some more of these stock market truths.

Written by Lawretta Egba.