Opinion Piece: Rather than Fundamentals or Technicals, It Is "Public Confidence" that Controls the Market

Bibek Panthi

What controls the stock price of a company? What causes it to change? When will it fall? When will it rise? If there were any predefined formula, who would die poor?

Price of stock changes due to demand and supply; it is an economic theory. But, does price fluctuation stick with that simple line - "It is because of demand and supply"?

It may be prima facie YES, but a big NO in the case of the Stock market since there is the root to such demand and supply too.

The price of a stock fluctuates with the fluctuation of public confidence towards the market. Public confidence means strong faith of market participants towards future prospect of the market which might be because of many factors such as Liquidity (Money supply in the market), Fiscal Policy (Government collection of funds and projected spending along with tax laws), Political stability, World economy, uneven circumstances such as natural disaster and pandemic.

Most often, we come across a number of questions regarding which stock to buy and when to buy. It's not that simple to guess the fact but yes, we can definitely minimize the risk of loss if we look after few facts relating to the stock we wish to buy or sell:

1. Earning, Reserve & Dividend History: When a company earns, either it retains or it distributes to its shareholder. In either of the cases the wealth of shareholders increases. If you trigger buy at the wrong time that means when the stock is overvalued at the market, you need not regret if earning and reserve are on the higher side with up-trend as per quarterly reports. The weighted average cost will definitely get reduced by the time when you get a bonus share/dividend. This definitely does not apply to traders since they will not love funds being blocked for a long period of time. Here, earnings and quarterly reports act as a catalyst to strengthen the public confidence, and eventually demand increases and so does the price.

2. Share Capital: The simple logic of higher the supply lower the price applies to some extent in this case. When the number of floating shares is high, the strong confidence of participants will only hit the price up, else, for every demand, there will be supply in the market thereby leading to no huge rise in the price of share even the demand is high. The case can be related to the share price of most of the mid-range commercial banks in NEPSE. A company with low floating shares with good business by the time can be eye catching stock for buyers since the company might need to increase its share capital either due to regulatory requirements or to expand its business. In either of the cases, shareholders will be benefited from the right share or bonus dividend.

3. Political Environment: Politics has a strong impact on the stock market. Once the government Shakes, the public switches their confidence from "Action" to "wait and watch" since what goes next cannot be anticipated. We have a bitter experience that a sentence-expression of Minister relating to stock market degrading the public confidence so hard that the market starts a long bearish trend. Political dilemma worsens the public confidence and they try to cash out their investment till stability is gained.

4. Extra-ordinary circumstances: After the devastating earthquake and first wave- Pandemic (till the day), NEPSE got to hit historic records with a gradual increment in the NEPSE index.

The most common assumption is that there are no other investing sector movable such as General Business, Real-estate investment, etc. and it is believed that the fund is dumped into the market. I don’t completely neglect this fact but if the public confidence is up only due to surplus fund not finding investment opportunity, then the hike in the index might be a bubble-trouble that sooner or later bursts since the market is not getting mature participants with basic fundamentals but only fund injectors. In the present context, this can be attributed to few stocks that are gaining unusual up-momentum with no strong fundamental support but trading with a huge volume.

I have been using the word "Public Confidence" many a time above. This can be related to the above example of an unusual up-momentum of few stocks, what led their price to rise? Was that fundamental analysis, technical analysis, or something else? The answer is "Something else" and that something else is public confidence that might have been gained through:

1. Social Media Publicity
2. Quick Earning Mentality
3. The suggestion of Influencers in Social Media
4. Lack of knowledge regarding Bull trap and bear trap and the existence of stocks that can be manipulated (low volume, low market cap.)
5. Too much Greed or too much fear.
6. Immature investment decision. (Learning before doing and slowing down the investing speed would reduce this risk.)

Moreover, with 7 years of experience in this particular field as a long-term investor, what I learned is, with even a few basic facts one can secure the investment. Some of them can be:

1. Giving a birds-eye view on Market Depth before buy/Sell: Regardless of the volume of buyer and seller what we should look after is the rate of the transaction at the buyer's price and Seller's price. Analyzing this particular fact gives a basic idea about the buyer's confidence and the seller's one.
2. Plot the Quarterly Earnings from core operating activities and Reserve into a simple graph: Once you find the up-trend in this indicator, the company is doing well. (However, there might be various reasons for increment in profit which requires expertise to get) but still, increment in core operating profit depicts the direct earning of business. Comparing with previous year financial data would more often give clear understating of the company's performance.
3. Reserve a certain percentage of investment fund for averaging the cost: This Particular process helps investors a lot to make a profit sooner since the downfall of price after buy does not create a panic situation if further buy can be triggered with reserve fund thereby reducing weighted average cost.
4. Be choosy in Stock Selection, rather than only cheap go for blue-chip: Early Investors with no good experience should not attempt trading without proper knowledge of Stop Loss strategy. It's often hard for every individual to sell the stock below the cost but it has to be the part of trading strategy if you go for Trading rather than investing.

However, if you are an investor don’t look for cheap and risky stocks rather go for Blue chip stock such that your investment is always a win-win situation in long run with attractive bonuses and dividends.

1. Don’t blindfold your eyes by Social Media Content: Bombardment of "BOOM BOOM" posts in social media frequently makes a new investor confused whether the fact is true and more or less drives their psychology towards buying or selling decision. Control of investment decision shall reside within the self so as to make a golden decision. This can be achieved by filtering the information received in social media by self-analysis and research.

The above points are not the only criteria to be checked; however, these can be the influencing factors and Tricky spot for New and Small Investor. I often hate the word "Small Investor" being used since small investors and big investors should be identified with the percentage (%) return earned by the individual rather than the Value of the Portfolio.

Article by Bibek Panthi. This is an opinion piece. Sharesansar does not endorse any particular investment strategy. Reader discretion advised.