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By. R. M. B. Senanayake
The SEC continues to impose price bands whenever the price of a stock rises too rapidly. There may be a case to do so in the case of highly illiquid shares. But there is no doubt that it is a deterrent to day trading. The type of trading that most people are familiar with, is buying stock, waiting for its value to increase, and then selling the stock to take their profit (known as buy and hold trading). But today the market is dominated by short term traders who buy and want to sell at a profit in a day or two or even in the same day. There is of course nothing wrong in such trading. Day traders also want to make a profit when a stock’s value is decreasing, so they need to be able to sell a stock, wait for its value to decrease, and then buy the stock back at a lower price (known as shorting a stock). But unfortunately our market has no provision for short selling and hence this trading option is not available. This undoubtedly makes for large increases in the price of a stock which is in demand by short term traders.
You may read and hear many explanations about stock prices and why they rise and fall like they do. You will hear about the influence of company earnings on stock prices or the economy or the credit market. While all of these factors figure into price changes, they have little direct impact on prices. What these and other factors do is change the balance of supply and demand. Stock prices are a function of supply and demand. Other influences such as earnings, the economy and so on may affect the desirability of owning (or selling) a stock.
If a company reports surprisingly low earnings, demand for the stock may wither. As it does, the balance between buyers and sellers is changed. Buyers will demand a discount off the existing price and many motivated sellers will accommodate. More sellers than buyers means there is more supply than demand, so the price falls.
But there are other factors too, like the market for control of companies which also affect the balance of supply and demand. Short term traders can make money only in stocks which have high volatility. It is when a share price fluctuates a lot that the trader can make money. Of course he has to buy when the price is low and sell at its maximum rise. Stocks that have gone up recently, especially those with a lot of press, often attract even more buyers. This obviously drives the price up even higher. People get excited about what they read and see and want a part of the action. They jump into a stock that is already trading at a premium – they buy high. Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it’s not investing.
What traders do is to buy a share which is moving rapidly and then sell out when he has made a sufficient profit. There is nothing wrong in that. The imposition of price bands deters such short term trading. High turnover benefit brokers as well as the CSE, the SEC and the government since they get higher income there-by. What then is the rationale for imposing price bands?
The writer is a senior economist and functions as the General Manager at a Colombo based Stock Brokering firm. You can reach him on raja.senanayake712@gmail.com
http://www.news360.lk/in-depth/price-band-impacts-the-%e2%80%9cday-traders%e2%80%9d-who-dominate-the-market
The SEC continues to impose price bands whenever the price of a stock rises too rapidly. There may be a case to do so in the case of highly illiquid shares. But there is no doubt that it is a deterrent to day trading. The type of trading that most people are familiar with, is buying stock, waiting for its value to increase, and then selling the stock to take their profit (known as buy and hold trading). But today the market is dominated by short term traders who buy and want to sell at a profit in a day or two or even in the same day. There is of course nothing wrong in such trading. Day traders also want to make a profit when a stock’s value is decreasing, so they need to be able to sell a stock, wait for its value to decrease, and then buy the stock back at a lower price (known as shorting a stock). But unfortunately our market has no provision for short selling and hence this trading option is not available. This undoubtedly makes for large increases in the price of a stock which is in demand by short term traders.
You may read and hear many explanations about stock prices and why they rise and fall like they do. You will hear about the influence of company earnings on stock prices or the economy or the credit market. While all of these factors figure into price changes, they have little direct impact on prices. What these and other factors do is change the balance of supply and demand. Stock prices are a function of supply and demand. Other influences such as earnings, the economy and so on may affect the desirability of owning (or selling) a stock.
If a company reports surprisingly low earnings, demand for the stock may wither. As it does, the balance between buyers and sellers is changed. Buyers will demand a discount off the existing price and many motivated sellers will accommodate. More sellers than buyers means there is more supply than demand, so the price falls.
But there are other factors too, like the market for control of companies which also affect the balance of supply and demand. Short term traders can make money only in stocks which have high volatility. It is when a share price fluctuates a lot that the trader can make money. Of course he has to buy when the price is low and sell at its maximum rise. Stocks that have gone up recently, especially those with a lot of press, often attract even more buyers. This obviously drives the price up even higher. People get excited about what they read and see and want a part of the action. They jump into a stock that is already trading at a premium – they buy high. Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it’s not investing.
What traders do is to buy a share which is moving rapidly and then sell out when he has made a sufficient profit. There is nothing wrong in that. The imposition of price bands deters such short term trading. High turnover benefit brokers as well as the CSE, the SEC and the government since they get higher income there-by. What then is the rationale for imposing price bands?
The writer is a senior economist and functions as the General Manager at a Colombo based Stock Brokering firm. You can reach him on raja.senanayake712@gmail.com
http://www.news360.lk/in-depth/price-band-impacts-the-%e2%80%9cday-traders%e2%80%9d-who-dominate-the-market
: Hope you got it right no offence
