We all know about the very famous scientific law which says, “For every action there is a corresponding reaction”. However, in the case of stock markets, this statement does not hold true, all the time. In order to justify my above statement, I would like to recollect the announcement of inflation figures which were made on Fridays and the market which went up and then fell back after a couple of days. You thought that the market would fall when the news came in but the opposite happened. Such is the situation of the market.
People should think before reacting. They do react but on the basis of emotion. Also, their emotions changes very fast, when they see the market ( or I would say there stock) rising or falling. When people see markets going up, they start buying in the hope that others know better. This self doubt creates financial blunders. It is important to have faith in using ones own common sense and buy when you think you have the right valuation and not to catch the momentum. You can always have the momentum stocks in your basket but not only the momentum stock but to an extent of 10% is always fine.
Stock markets are hard to understand. You may not necessarily see a reaction for every action. For example: Three friends, Jack, John and Jim, where Jack and Jim holds 100 shares of company xyz. Jack sells his 100 shares to John at Rs. 2,500 when stock market was climbing like anything. After a week, the price drops to Rs. 2,000. Jack gets lucky, as he stands to earn Rs. 50,000. He can now buy back the same shares for less. Poor John has lost Rs. 50,000, since the value of his investment has depreciated. Hence, we immediately tend to apply this situation with this law, “every action has a reaction”. But what about Jim, who did not react at all? Jim is also poor by Rs.50,000, although he made no transaction. He faced a reaction without acting. This is what stock market is all about. It does not understand physics. So you better treat stock market, the other way.