Thread by @caswapnilkabra

A simple thread for beginners on 'How the price of a stock is decided?' 🧵👇
This can be helpful to understand the basic economics behind the stock price fluctuations.

#economics #financialliteracy

1. Let us first understand how the prices are decided! or to start with, let us know who decides the price? The buyer or the seller? Let us find out.

2. So, you enter a shoe shop and like a pair of shoe. You see the price tag which displays Rs.3000. You try to negotiate and then ultimately the seller agrees to sell you the shoe pair at Rs.2500.

3. Now, few things to note from the above case:
👉The final price of the shoe Rs.2500 is decided by both the buyer and the seller. In economics, we call this as ‘Equilibrium Price’.

👉At less price, seller won’t be willing to sell. And at more price, buyer won’t be willing to buy. So, price is a mutual thing.
👉Buyer *demands *the goods and Seller *supplies* them.

4. This is exactly what happens in a stock market.
However, the major difference is that in a stock market there are too many buyers and too many sellers. Hence, it is not possible for one man to control the price.

5. Now, let us find out how fluctuations in ‘Demand’ and ‘Supply’ impact ‘Price’. I have four cases to discuss to have a better understanding.

6. CASE 1] INCREASE IN DEMAND
So, whenever there is increase in demand, the price of the goods will go up.

Ranveer Singh, having struggled during his initial days, achieved tremendous success and fame post Padmavat release. The actor realized that his services are in demand and therefore he hiked his fees.

This is what we see in stock market. Whenever a stock is in demand, we see the price soaring high.

7. CASE 2] DECREASE IN DEMAND
Needless to say, a decrease in demand will have a reverse impact on the price of the goods. Let us see a valid daily life example for understanding this.

Have you ever wondered why multiplexes like PVR charge lesser amount for morning shows compared to evening shows?

Well, the answer lies in simple economics. There is less footfall in morning and hence less demand. So, to occupy more seats, the multiplex charge less. Hence, decrease in demand leads to decrease in price.
The ditto applies to stock market.

8. CASE 3] DECREASE IN SUPPLY
Decrease in supply will make the price move up.

So, I try to sell a mineral water bottle in an arid, dry dessert. It is obvious that people would pay a premium for this bottle as there is no supply of water in such place. Hence, I may end up selling this bottle for even Rs.5000.

Now, in stock market, whenever there is a great news for stock, the people already having the stock won’t sell.
This is because they know that the price will eventually go up. Hence, less supply will lead to increase in price.

9. CASE 4] INCREASE IN SUPPLY
Increase in supply leads to fall in price.

Let’s try to sell the same bottle near this beautiful river flowing with fresh water. Now, why would anyone buy a water bottle when there is ample supply of water and that too free of cost. Hence, the price of this bottle here would be zero.

So, we know now that increase in supply will have a decrease in price.

10. In stock market, the buyers and the sellers are constantly changing. Hence, there is so much fluctuation in 'Demand' and 'Supply'.
That's exactly why stock prices are so volatile.

The End.

@Dinesh_Sairam, @dmuthuk this can be help beginners to get a primer on stock price movements and the economics behind it 🙏