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Do stocks move on fundamentals? Not always!

Every now and then investors in general and retail investors in particular wonder about what makes indices move so frequently over short period of time? Is it the company fundamentals, or market news: good or bad, or demand and supply, or is it a combination of all or few of these along with some other factors? First of all, let’s have a look at the Sensex recent movements:

Sensex returns have remained very fluctuating (read negative) over a period. Let’s have a overview of returns yielded by the Sensex:

A week                          -1.60%

A month                      -7.60%

3 month                      -13.90%   and

6 month                        -1.90%

Essentially, the market (Sensex in the present case) has given positive returns over a long period over one or more years.

1 year                                9.80%

2 year                             84.30%

3 year                                6.60%      and

5 year                              74.30%.

30 days, 50 days, 150 days and 200 days moving average of the Sensex are 20,142.90, 19,478.48, 18,166.38, and 17,820.28 respectively. The index closed last week down at a level of 17,728.61. Now, shall we go ahead with the proposed factors seemed to have been influencing stock returns, one by one briefly.

If we are talking about the company fundamentals, they are not changing everyday unlike their stock prices! It is expected and justified that stock prices fluctuate around the announcements relating to concerned companies. These announcements may include quarterly and interim financial results, major business deals like M&A, big contracts, clients acquisitions, etc., but such events do not happen on a regular basis. So, it is obvious that these factors do not factor in stock fluctuations every time any stock price moves up or down. Earning per share (EPS), Price-earning ratio (P/E Ratio), and market cap are, of course, some of the best things to observe for any stock market investors. These factors do change with several factors underlying it.

Demand and supply of any stock do matter a lot with respect to its movement over the index. This fundamental rule of economics holds good for the equity market as well. The price is directly affected by the trend of stock market trading. When more people are buying a certain stock, the price of that stock increases and when more people are selling he stock, the price of that particular stock falls. Now it is difficult to predict the trend of the market but your stock broker can give you fair idea of the ongoing trend of the market but be careful before you blindly follow the advice.

News is undoubtedly a huge factor when it comes to stock price. News here means the news coming from all the media, be it print, electronic, or whatever. Though news come from across a lot of sources. They may be good or bad, true or just plain rumor, cooked or raw; its the quality of the news and the investors’ capabilities to exploit them that matters to a significant level.  Positive news about a company can increase buying interest in the market while a negative press release can ruin the prospect of a stock. Having said that, you must always remember that often times, despite amazingly good news, a stock can show least movement. It is the overall performance of the company that matters more than news. It is always wise to take a wait and watch policy in a volatile market or when there is mixed reaction about a particular stock.

All these factors altogether along with some more implied factors make investors change their positions and thereby moving the market way too frequently. These implied factors might be the underlying psychological biases such as heuristics, over- or under-confidence, (in)ability to handle or factor into the complex financial information (though it may be equally applicable to simple information also). Understanding these all factors certainly helps investors take informed financial/trading decisions and keep the markets more efficient and reflect the real values of stocks listed on the indices.

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