One way of looking at the stock market is that it represents the sum total of the opinions of everyone who is involved. If you work for an investment bank and are controlling billions of pounds of funds, then your opinion counts for a lot more than most, but even small individual investors have a say.
As the opinions of all the buyers and sellers changes, the price of a share will move to reflect whether the bulls or the bears, the optimists or the pessimists are having the bigger say. If you are going to understand the stock market, you need to understand how the people who are investing in it think and what is driving the price movements.
At this point it is probably a good idea to distinguish between the noise and the fundamentals. In the short term particularly, things can go up and down in price for no particular reason, whereas in other situations the reason for a movement is quite obvious. If an oil exploration company discovers a big, easy to access oil field, then that company’s shares will go up in price for good reason. On the other hand, a share might lose 5% of its value with no obvious cause before regaining it back over the next couple of days.
Market reports are a good way of seeing how random daily movements can be and how much rubbish is written about the financial markets. One day the market report will say “The market dropped today on poor employment news from America”, while another day it will be “The market shrugged off poor employment data to push ahead strongly”.
The basic format is; there has been some news and the market has done something. In reality, the two may be related or they may not. But if the market can go the opposite way to what is expected from the news, then it is also possible that the market can go the same way as the news would suggest, but for a completely unrelated reason. The people writing the market reports don’t seem to have realised this, though.
Anyway, if you want to know what the people in the market are thinking, it is easy enough to find out. The finance pages of most newspapers have broker recommendations, press releases and research from analysts. There are plenty of finance web sites which are full of different opinions and the comments at the bottom of articles also give you an idea what the other readers are thinking.
The important thing is not to get too bogged down in the idea that there is a right opinion to have and anything which disagrees with it is wrong. On any issue, whether commodity prices, share tips or interest rates, there are going to be different predictions of what is going to happen next. That means there will always be people who turn out to be wrong, and that will include you at some point.
Even if some of the opinions you come across are dubious, unlikely or downright ridiculous you can still learn about what is guiding the actions of other people in the market. It is very dangerous as an investor to have an attitude that you cannot possibly be wrong. The more other opinions you get to be familiar with, the more you can prevent yourself from being overly confident in your own predictions. If you do find yourself on the wrong side of reality, with the market moving against you, you might be able to recognise that someone else’s perspective is a better fit with the facts and change your position before things get worse.