What Moves Markets?
Date Added: March, 2001
By Ryan Totka
Website
Isn't
it strange how this whole world revolves around the law of supply
and demand? For those of you who are not economics majors, here
is a quick lesson. If an item or service is in short supply, people
will pay more for it, if the demand out-strips the supply. On the
other hand, if there is an abundance of a good (supply) and there
is little demand, the price will fall.
For example,
do you ever wonder why you pay a lot for the new Sega game console
when it first comes out? It's because there aren't many
out there and everyone is trying to get one. Whether you are purchasing
an item at a Super Wal-Mart, filling up your car with gas or trying
to get a date at a local nightclub, the law of supply and demand
comes into play. Look around and you will figure it out.
The IPO market is a great example supply and demand
in action. Often, the first day a stock hits the market, there is
greater demand than there is supply of stock. When this happens
the stock will run up on the first day of trading because there
are more investors looking to buy the stock than sell it. Many variables
affect the way a stock performs in today's market, including
company announcements, interest rates and economic conditions. Here
are a few things to pay attention to.
Company News
The announcement of company news can make or break
a stock. When a company reveals a new product, technology or perhaps
a new line of business they will venture into, Wall Street and investors
have a reaction to it, which may be good or bad. Sometimes it takes
a while for investors to step back and investigate how this may
affect the bottom line. For example, when AT&T decided to go
into the cable and high-speed Internet market, Wall Street didn't
seem to like the move. Although they have a great brand name, they
didn't have the first mover advantage to this industry. They
have been a quality company in past years, with good earnings and
a low price to earnings ratio, but many analysts feel AT&T may
not be profitable in this segment, which has dragged the stock price
down severely.
Mergers and Acquisitions
Everyday we turn on the TV or log onto the Internet,
we hear about one company buying another or deciding to merge. One
method that companies move into new markets or maintain dominance
in a market is through acquisitions. The biggest merger ever between
America Online and Time Warner should finally take place later in
the year forming the biggest media company in the world. The day
when America Online announced they would buy Time Warner for $183
billion in stock, Time Warner's stock rocketed up 40 points
intra-day. News of big mergers like the AOL/ Time Warner deal, usually
send the company that is being acquired much higher. In the long
term, the stock of the company being acquired eventually converts
to the company making the acquisition, only if it is a stock for
stock deal. Many mergers and acquisitions are cash deals.
Organization Restructure
Another factor that affects a stock price is the restructuring
of an organization. Would you buy the stock of a company who is
constantly downsizing? The strategic goal for a company is to grow
and gain market share. They do that by consistently increasing earnings
and revenues, which in turn, comes from the quality of the labor.
Investors might respond to a stock when there is a major shakeup
in the organization. For example, when the CEO steps down, some
might see this as being negative, but others might accept the restructure
as a much-needed change going forward. The officers are the insiders
who are involved in the strategic development of the company. Without
quality management, no company can succeed over the long term.
Analysts Upgrades and Downgrades
Everyday, senior analysts from various firms will upgrade
or downgrade various securities. Some of the more well-known analysts
such as Ralph Alcompora from Paine Webber and Mary Meeker from Morgan
Stanley Dean Witter appear on CNBC from time to time and have the
power to make or break a stock. One example of an analyst really
is when Thomas Bock, an analyst at SG Cowen gave QXL.com (QXLC)
a strong buy rating and a 12-month price target of $1000. QXL.com
is a European online auction very similar to EBAY. The day Thomas
Bock made his upgrade and said QXL has the first mover advantage
in Europe and a very attractive business model, the stock soared
in the morning to as high as $117. Investors then stepped back and
questioned what this guy really said. The stock is currently trading
under $10. This is a perfect example of how an analyst gives their
personal opinion and drives up the price of a security only to have
it later fall back to earth. It was found out later that SG Cowen
underwrote the QXL.com public offering. Any coincidence you think?
Simply put, all of these factors may make a stock fluctuate
in price over the very near-term, but the real reason a stock goes
up and down in price is the number of buyers and sellers, again
relating back to the law of supply and demand. If a stock is in
high demand and there is limited supply, investors must pay more
for it. That point in between where buyers and sellers come together
is called equilibrium. Take a step back and think how much the law
of supply and demand affects our lives everyday.
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