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Stock Market Movements - Short Term vs. Long Term
The movements of the stock market can be very dynamic and swift or very steady and methodical. This often depends on the time frame you are referencing. The shorter the time reference, the more choppy and irrational stock movements appear. The longer the time frame the more smooth a stock's price movement becomes. The reason for this is that over time stocks tend to perform in line with their financial condition. If a stock has had consistent and steady growth, the stock's price will usually follow as time passes. However, in the short term a stock may perform much differently.
To find out why, let's look at what determines a stock's price. A stock price at any given time is simply the equilibrium price at which someone is willing to buy a stock for and at which someone else is willing to sell the stock for. Human emotion plays a critical role in a stock price, especially in the short term. The two primary emotions that cause a person to act in the stock market are fear and greed.
If a stock is going up, more people are likely to buy it because they are afraid of missing out on an opportunity. Conversely, if a stock is declining, people are more likely to sell because they are afraid of losing more money. However, there are also some opposing forces such as people are often afraid to sell a stock because the stock might go back up and they don't want to miss out. Similarly, a person might be afraid to buy a stock as it is going up because it might go back down and they will lose money. While all of these are natural thoughts and emotions in the short term, in the long run the market becomes more rational and less dictated by emotional bias. Therefore, in the short term stocks can move in directions that seem opposite of its financial success or failure. As time passes, emotional price movements will subside to movements based on the financial condition of the company.
In conclusion, if you are buying a stock based on financial information, don't be too concerned with day to day price movements. Instead, continue to evaluate the financial condition of the company and base your decision to buy, sell, or hold on that information. If you are going to trade stock in the short term, be prepared to learn how to evaluate what people are thinking and how they are likely to act based on those thoughts. This is a difficult thing to do, but stock charts and indicators are often used as a gauge as to what the people in the market are "thinking" and doing.
