2012: Advent Trading: Why does the price move?

by on December 11, 2012

When a symbol is initially posted on an exchange it’s called an IPO or ‘Initial Public Offering’, which is essentially the bosses of the company saying, “I think a share of my company is worth this much!”. If nobody bought or sold the shares at that price then the value would remain constant. However, if someone buys the share, then the quantity of them remaining diminishes and the price rises. It’s all a case of supply and demand. See?

News stories will naturally play a part in the markets. If a company is doing better than expected, it’s sensible to expect the price to rise. If the company does worse, the price normally falls. Changes in management of the company can cause the price to fluctuate.

When trading you’re likely to look at specific symbols. Symbols, with exception of currencies, aren’t traded 24 hours a day, so there will be specific symbols with which, when trading, you become accustomed to working with. Therefore, it’s also important to know when the markets for those specific symbols open. For example, the LSE opens at 8am and closes at 4:30pm.

Why should this matter? With symbols not being traded over the weekend nobody knows what it likely to have occurred. Over an evening it’s possible to say, on some symbols, that the price won’t have moved very far. However over a weekend, that’s 2 days of virtually no trading at all. Prices can move all over the place. This leads to increased volatility in the market on a Monday morning. Similarly on a Friday evening, buy and sell orders will be all over the place as people generally don’t want to hold short term trades over the weekend.

This is why, when trading shares, you need a good idea of how long you want to have the investment for (jargon: ‘investment’ can also be called a ‘position’). Will you open or close it in a day? Will you hold the position for a week? How about a month? A year? It matters, because it changes the type of trend you’re looking for.

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