Basics of Stock Market 8: How stock market prices fluctuate in a day
By now you have a good idea of how the stock exchanges work. It is in these exchanges buyers and sellers meet to exchange their shares. To understand how the price fluctuates in a day, we need to understand a simple concept of demand and supply. I will take you to different real-life scenarios to make you understand this in-depth. The whole stock market hangs on this very basic principle.
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Demand and supply: Artwork
This is where human psychology comes into play. With a simple example, suppose you’re an artist and you draw amazingly well. Since you have this talent you sell your artworks, why waste talent, right? Now your established artist but let’s get back to the olden days. In the initial days, you were selling your artworks for a very less price.
A 10-hour long painting, you were selling for a mere 300 rupee. But as time passed by, you gained experience. With experience, came the demand for your talent, your artwork. People started to recognize your talent and started buying from you. With recognition and demand, came the responsibility to sell your artwork.
Since you have only 24 hours in a day, the artworks you will be selling will be the same 10-hour long artworks. But since the supply is limited, or capped, the people who want to buy your artwork are more (you’re a recognized artist now). Thus, you started to sell your unique artwork now at 3000-4000 apiece.
Here we can see, the supply is fixed or less as you’re the unique artist and demand is more since the number of people wanting to buy your artwork is more. Naturally, by this you start to increase your price and thus 300-rupee artwork is now at 3000-4000 rupee. You can see with demand; the price has increased.
Demand and supply: Onion
This applies to all the vegetables, but since you can find onion in just about any food, I have taken this example. In states like Kerala, where agriculture is very less, we normally import vegetables from other states. It’s the month of May and the price of onion is 50 per kg, you can do plus, minus 10 taking the retail guy's profit. But more or less it's at this price.
In August, heavy rains have come quickly and the crops are no longer able to stand this heavy rush of rain. The crops die out and this also took a toll on the onions stored. As I mentioned, the demand for onions is the same, since all the dishes need onions. If 100 people are buying onions at a rate of 50 a day in the month of May, the same people will buy in the month of August as well.
But, to the twist of events, heavy rains slashed the supply of onion and now there is a shortage of onion. But people need to have an onion to survive, thus, these 100 people is now left with only 50 onions. What happens here is pure human psychology, basically the greed. One person will say, I am willing to pay extra 10 rupees for the same kilo of onion. But the next person also needs onion, he will say, I am willing to pay extra 20 to buy the same kilo of onion.
So, practically, the retailer will sell to the person who bids the larger amount. Thus, the price of onion increases. Even though this sounds simple, this complex chain of events leads to the rise of price of onion. Thus, in the month of august, the price of onion is 100 rupee. Using this psychology, the retailers also increase the price since they are also limited with the number of onions they have in hand. This actually happened in the year 2020, where the prices of onion were close to 100/kilo. What a lovely onion story!