Why do people buy stocks
Why are you actually buying stocks?
When I ask this question to investors, I almost always get the same answer: "To earn money, of course!"
Certainly, investing your hard-earned money in stocks is the right “motivation”.
But do you also proceed in this way when buying shares?
I would like to start a little experiment with you in this post.
Which share would you have bought?
You will soon see a chart showing the price development of two stocks.
Analyze the graph and decide which of the two stocks you would buy.
One tip: For an honest answer, don't look any further down, where you will find the solution in the form of two individual charts!
Are you ready? - Here we go!
Which share would you have bought?
Ok, you've made up your mind - which is what I can tell when you read on.
And why do most investors decide that way?
No matter how YOU have decided: Most investors would have preferred the stock with the red price trend in this choice - why?
Many investors are guided by wrongly interpreted, short-term price developments when entering the market.
The “red” stock has seen a clear upward movement and has just fallen back sharply.
That means: The share with the red price trend happens to be very cheap to acquire right now.
And a look at the development so far fuels the hope that the latest price setback will be quickly made up again.
The black share price, on the other hand, barely moved in the period under review and mainly trended sideways.
At the time shown on April 1, 2016, the price had also just increased significantly by almost + 10%.
For the "black" share you would not only pay significantly more than a few days ago:
The sideways movement also signals “boredom”, which is likely to continue.
The stocks shown are Apple (black price trend) and ExxonMobil (red price trend).
I'll show you both stocks in a single chart, and you'll find that Apple would have been the better decision to buy.
But why do most investors think it is cheaper to buy a stock that has just become cheaper? - The answer: because these investors think like they do with everyday shopping.
You don't go shopping, you go to an auction
Hardly anyone wastes a thought on WHY a share has just gotten cheaper. The answer is simple and simple: because supply has exceeded demand.
The stock exchange is nothing more than an ongoing auction in which shares are auctioned. The only difference is that stock market prices can also fall.
If nobody wants an object at an auction, then this object will not be paid more expensive.
Most of all, an object increases in value that a large number of auction participants would like to own.
Your auction indicator: the on-balance volume (OBV)
This mechanism of supply and demand can best be seen in the on-balance volume.
The indicator links the daily price changes with the corresponding sales.
Increased demand drives the price and the on-balance volume up. If the supply exceeds the demand, then the price and the indicator fall.
Since the big investors determine the trends of the shares, the OBV is ideally suited to observe their behavior.
Apple was a better choice
Let's take a look at the following two charts:
Major investors fled ExxonMobil in August 2016.
The vertical blue bar shows the time of the purchase decision from the 1st chart.
The broken upward trend in the OBV clearly shows that the major investors had just fled the share.
Major investors joined Apple in August 2016.
It was exactly the other way around at Apple: The on-balance volume had only generated a new interim high in mid-July 2016 and thus formed an upward trend.
So Apple was clearly the better investment decision. While ExxonMobil lost around -5%, Apple shares rose by a good + 36%.
If you are motivated by making money investing in stocks, this is the right mindset.
However, when buying stocks, you shouldn't make the same decisions as you would with your daily shopping!
When a stock falls in price, the only reason is because more people want to "get rid of" the stock than want to own it; the supply exceeds the demand.
If this is the case, however, then you can generally assume that this trend will continue for a long time to come. The reason for this is the large investors who determine the trends in stocks:
Why should big investors buy back a stock they just wanted to get rid of?
The easiest way to understand the behavior of major investors is with the OBV.
If you base your purchase decision on these considerations and analyzes in the future, you will achieve a significantly higher hit rate as a result.
Apple: Buffett's largest portfolio position with dream numbers The largest position in the portfolio of stock market legend Warren Buffett, Apple, presented dream numbers a few days ago. The share rose only slightly, however. > read more
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