Sunday, 1 July 2012

Why isn't this moviestock priced higher? A lot of traders own it.

Because no one is buying the moviestock.  Everyone who wants it has bought it already.

With no demand for the moviestock, over time the price goes down.

Price is determined by the laws of demand and supply, which are:

  • demand goes up, price goes up
  • demand goes down, price goes down
  • supply goes up, price goes down
  • supply goes down, price goes up.

Now, think about how these laws apply to HSX.

Supply doesn't matter so much on HSX, because the supply of moviestocks is essentially infinite.  The number of shares for a particular moviestock is determined by the number of traders who have bought it. There is no impact on price.

But demand does affect price.  When traders buy a moviestock, demand goes up and the price goes up.  When a trader sells a moviestock, demand goes down and the price goes down.  But demand can also go down when nobody wants to buy.

Now, no individual trader can own more than 100,000 shares of any moviestock.  This impacts demand - because once a trader has bought the limit of 100,000 shares of that particular moviestock, they can't buy any more of that moviestock.  Any demand that individual trader had for that moviestock has disappeared.

Now, think about what happens when traders do this collectively.  Traders buy the moviestock, which drives the price up.  However, as time passes there will be fewer and fewer traders who want to buy it. Either they already own it, or they never wanted to own it in the first place.  Eventually, we reach a place where no one wants to buy it, and the price falls due to the lack of demand.

This is similar to the real world.  When no one wants to buy something, the price of that thing will fall until reaches a point where people who are willing to buy it.  The number of people who already own that thing is irrelevant.

No comments:

Post a Comment