Market Trends
Public Company Valuations
The shares of a public company are often traded on a stock exchange. The value or "size" of a public company is called its market capitalization, a term which is often shortened to "market cap". This is calculated as the number of shares outstanding multiplied by the price per share.Volume Impact on Valuations
If all shareholders were to simultaneously try to sell their shares in the open market, this would immediately create downward pressure on the price the share is traded for unless there were an equal number of buyers willing to purchase the security at the price the sellers demand. So, sellers would have to either reduce their price or choose not to sell. Thus, the number of trades in a given period of time, commonly referred to as the "volume" is important when determining how well a company's market capitalization reflects true fair market value of the company as a whole. The higher the volume, the more the fair market value of the company is likely to be reflected by its market capitalization.The impact of volume on the accuracy of market capitalization is when a company has little or no trading activity and the market price is the simply the price at which the most recent trade took place [need better definition; "market price" is always the price at which the most recent trade took place]. This occurs when there are no buyers willing to purchase the securities at the price being offered by the sellers and there are no sellers willing to sell at the price the buyers are willing to pay.
Because there is little volume, it is difficult to determine a "price per share" since it largely depends upon whether the buyers or the sellers are willing to adjust their offers to make a trade.
Market Trends
It's tough if not impossible to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation can sometimes play a large (if not dominant) role in the markets. The extreme on the high end is a stock-market bubble, and on the low end a crash.The use of "bull" and "bear" to describe markets comes from the way in which each animal attacks its opponents. That is, a bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a bull market. And if the trend is down, it is considered a bear market.
Both bull and bear markets may be fuelled by sound economic considerations and/or by speculation and/or investors cognitive biases and emotional biases. The stock market is controlled by people and, as a result, by emotions, among them collective emotions.
Expectations play a large part in financial markets and in the changes from bull to bear environments. More precisely, attention should be paid to reactions to information, chiefly positive surprises and negative surprises. The tendency is for positive surprises to fuel a bull market (when the news continually tends to exceed investor's expectations) and conversely negative surprises tend to feed a bear market (with expectations disappointed).
Bull Market
A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc.Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. Of course, no bull market can last forever, and sooner or later a bear market (in which prices fall) will come.
Bear Market
A market condition in which the prices of securities are falling or are expected to fall. A bear market tends to be accompanied by widespread rumour, pessimism and negativity. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time.Back to the Education Centre