Market Crux #1: Can rich parties influence the market significantly?
Imagine a rich party and two poorer parties. The market exists of a stock where the rich party owns 4 stocks and the 2 poorer parties with each 1 stock (6 in total). The last quoted price was $15.
In the market, there are 2 parties willing to buy stocks, party 1 would like to buy 4 stocks for $15, and party 2 would like to buy 2 stocks for $10. The rich party decides to sell his stocks for $15. Now, the only party left to sell the stocks to are the $10 party. This would make the poorer parties left with the $10 price, for which they can sell their stock right now - making their stock lose value because of the rich party bailing out. Did their stock capital decrease to $10 each? And hence, can the rich parties in the world influence the market significantly?
Answer: Since the Last Trade is 15, one could say the worth of the stock is still $15. However, the problem lies in the definition of 'Current worth', which is, either the last trade worth or, actually, the worth for which they can sell right now. Thus making them own $10 each. The reason is that the rich party decided to sell. Would the poorer parties have sold, still the rich party would have lost money if a poor party decided to sell (3 times 15 plus 1 time 10 = 55, a loss of $5 for the rich party). Thus, this example has not proven the exponential increased power of richer parties - it only shows the effect of investors selling.
There is one tricky part, namely if we keep the original situation and the poorer parties, plus the new party decides not to sell against $10, then the market is in a stalemate, waiting before one of the parties move ground. Essentially, is there a likelihood that more parties will be interested? Or better, that parties would be interested to buy for, let's say, $14, and one of the poorer parties would agree on that then the price would change to $14. It all depends whether more parties would be interested in buying for a good price, or parties become more interested in selling; as of the current situation.
The price, in current exchanges, always reflects the current trade realization, if from this very moment in the market, people decided to go on a selling rampage (even for very low prices), then the prices would decrease dramatically. To which bottom? That all that depends on the buying side, suppose the sellers sell for practically any price, then the price would go as low as the buyers would like to. The current price would be when the last buyer and seller agree on the price. In reality, on every point in time on the day, buyers and sellers have agreed on the current price, changes in the price reflect a change in trader behavior.
Actually the market bottom is a strange term reflecting the idea when, at which price, the buyer sentiment will start coming. So to say, when new parties will enter the market to buy or current parties change sentiment. Vice versa, the market top, the ideal selling moment, is when people will realise they should start selling, buyers.
Imagine an increase in sellers and constant buyers - price down
increase in buyers, constant sellers - price up
increase in buyers and sellers - price depends on to which level they are -> which prices get the upperhand? Who are more pessimistic/optimistic?
decrease in buyers ánd sellers - idem as above
All the bold parts in this paragraph are indicators of real change in prices. Whether they do it by fear, greed or mass-behavior, prices are changed.
Market Crux #2: Can you manipulate the index (and make a profit out of it)?
Imagine an index, which is based on the prices of a certain portfolio a stocks - let's say 20 stocks. If you were to be very wealthy, one would invest millions in the call option in this index, along with millions in the stocks of this index.
Would this not result in a large positive result in your options, since the prices of your option went up because of the increase in price of the stocks (and hence the index)?
(The underlying assumption is that investing money as a new party in a market would make the prices increase.)
Market Crux #3: Investing decisions, buying or selling?
When doubting if you should sell, think of the face that selling (not talking about using negative numbers) is always less risky than buying. You only have lost opprtunity risk, but you do not have any downside potential anymore. As a buyer, you have (even with a call option). Its certain money versus an uncertain amount.
In order to manipulate the market, one should be able to persuade others. If you just want to nail a profit, be a master in mass pshyology or have an idea on the intrinsic performance of the product (i.e. buying Microsoft stock in the sixties).
Copyright by Harm Hoeksema (please contact me by www.harmhoeksema.nl for further publishing)
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