Last week, we looked at why companies list on the stock market and how investors can share in their growth. But what happens after a business becomes profitable? Does it keep investing every cent back into the business, or does it start rewarding shareholders? The answer often comes down to dividends.
Read MoreEvery day, millions of investors buy and sell shares on stock exchanges around the world. Yet few stop to ask a surprisingly simple question: why do public companies exist in the first place?
Read MoreOver the last three weeks, we’ve explored some of the hidden forces that drive markets.
We started by learning that prices don’t move simply because a stock is cheap or expensive. They move because of liquidity. When there are more buyers than sellers, prices tend to rise. When there are more sellers than buyers, prices tend to fall.
We then looked at how institutional money influences markets. Large funds can spend weeks or even months building or reducing positions, creating sustained buying or selling pressure that often drives long-term trends.
Last week, we explored why gaps happen overnight. New information changes what investors are willing to pay for a share, and the opening auction process helps establish a new equilibrium price before the market opens.
But what happens when the market can’t easily agree on that new equilibrium price?
What happens when thousands of investors suddenly realise they are positioned for the wrong outcome?
That’s when volatility explodes.
While retail traders make up part of the markets, the biggest moves are often driven by institutions. Pension funds, hedge funds, asset managers, insurers and investment funds control billions of dollars and can hold positions that are larger than the daily trading volume of some companies.
Read MoreMost people think markets move because of value. A company looks cheap, buyers rush in. A company looks expensive, sellers take profits. Simple. Except that’s not how markets actually behave day to day.
If valuation alone controlled markets, “cheap” shares would immediately bounce, “expensive” shares would immediately fall, and traders everywhere would make easy money. But we all know that’s not reality.
Sometimes a stock looks ridiculously cheap and keeps collapsing. Sometimes a stock looks wildly overpriced and keeps flying higher.
Why?
Because in the short term, markets are not driven by value. They are driven by liquidity.
Get the latest trading and investing recommendations straight to your inbox!
Privacy: We never share your email address You can unsubscribe at any time