How Stock Trends are Formed

Stock trends are formed because of supply and demand. When demand (buy) is greater than supply (sell), stock price rises and the uptrend is formed. On the contrary, when supply (sell) is greater than demand (buy), stock price will goes down and the downtrend will be formed.

How Uptrend is Formed

Imagine that a fund manager discover or expect that a stock with high propect with strong profit in the near future. The fund manager then is willing to pay more than the current price to buy a certain percentage (e.g. 20%). The whole purchase of the fund manager may take a few weeks or a few months to complete. Here’s may be the scenerio for each purchase (e.g. 0.5% or 1%) by the fund manager:

  1. the price of the stock will be pushed up,
  2. the fund manager will hold the stock after each purchase thus reducing the supply of the stock,
  3. when the price of the stock rises, it will attract other fund managers and small investors like me to purchase thus increasing the demand of the stock.
  4. When the supply is reducing, buyers must increase the price to purchase the stock.

Then the stock uptrend is formed and continue.

How Uptrend End

At some time after the uptrend,

  • some fund managers or big investors may notice or decide that the price of the stock has risen too high. The price of the stock may beyond the real value of the stock.
  • the price goes very high and some investors may wish to take profit.

Under this situation, the fund managers and big investors will begin selling or distributing their stock usually before the semi-annual revenue report or annual report, afraid that the revenue report may be disappointed and frustrated.

Unlike small investors like me, fund managers may take a few days or a few weeks to sell most or all their stock. Now the scenerio may be:

  1. the price of the stock will go down,
  2. the fund managers will distribute or sell all or most of the stock thus increasing the supply of the stock,
  3. when the price of the stock go down, it will initiate other fund managers and small investors to sell thus further increasing the supply of the stock.
  4. When the supply is increasing, sellers must decrease the price to attract new buyers (unfortunately usually small investors) to purchase.

Then the stock downtrend is formed. The worst situation is when the low price even cannot attract new buyers. Then price will be pulled down drastically and the stock crisis formed.

One Response to How Stock Trends are Formed

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