Share Price Analysis
Share values influence the economy…a myth resolved
Whenever share value is a matter of discussion, a persistent idea among investors is noticed which speaks about a relation between share prices and economy. Most of the investors continue their operation in stock market with the common perception that share value can influence economy. Whereas very few evidences can be found where share prices are advocated as supremo to curb a nation’s economy. Yet, this idea continues to prevail with full swing.
Flipping through the basic economics book we can well fathom then secret behind price setting, which is done by the invisible hand of supply and demand. If this is a universal truth, then this theory of demand and supply will be applicable on share value also.
Using this theory coupled with the usual idea among investors about stock market and economy, we will arrive at a unique situation. This will imply that stock values are determined by the stock supply additionally the share market will decline before the economy slows down. If such a situation has to arise then we will see a huge supply of new stocks before economic recession. Now it is well known that such a situation is not practical since issuing of new IPOs in the share market doesn’t indicate recession. Rather new IPOs are issued during the growth period of a nation’s economy as money earned from the IPOs is utilized for economic development and growth.
Even after offering an extensive argument above, there is still a doubt as we often find that the stock market moves first before the economy takes a turn. This is because most of the investors, judge share values on the inherent value of the underlying company. The inherent value of a share involves the company’s earnings and performance which is constantly under the watch of investors. Naturally, investors who are well informed tend to predict a forthcoming boom or recession by studying company positions in advance. This is the reason why shares are sold much before pulling down the share value in Sensex, before the economy really falls into the ebb. Apparently it may look as if the cause and effect relation begins from the stock market itself, but rather it is the investor foresight developed through knowledge that predicts the fall of economy much before it really happens.
For further knowledge on share price analysis log on to …www.angelbroking.com
About the Author
Angel Broking is one of the best stock broking and wealth management companies in India. Angel Broking offers various products and services to Indian investors including online stock trading, mutual funds, derivatives trading, commodity trading, IPO, PMS and investment advisory services.
Identify Bottoms, Part II — Stock Price Analysis (#50)
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