Stock Market Behaviour in the Short-Term vs Long-Term

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Question :

Questions- This assessment will cover the following questions:

  • How stock market fluctuates the prices in the economy and influences the behaviour in the short and long-term market.
  • What is the role of effectiveness of market in ascertaining the prices in the economy.
Answer :

Essay on the Stock market behaviour in the short-term vs Long-term

In the context of voting machine and weighing machine which refers short term and long term stock market behaviour of stock market, I can say that for investing shares and run business for short term is like a voting machine in which an organization calculates a sum of something in which firms and popular and unpopular. On the other hand, in the type of long-term company is consider as a weighing machine because it considers and evaluates each factor or substance of the company. So, I can say that in the type of long-term in which company is considered as a weighing machine, company wants an effective and actual business performance and not investing public's fickle opinion about its prospects in the short run (Maio and Santa-Clara, 2017). In the short-term, situations can be changes to the great extent which can be harmful for the company. It is considered as a voting machine because at the time of voting, all participants promises to do something unique and effective and influence voters to vote them. They promise to voters and public to do something extra and all what they want but after giving votes they do not fulfil their promise and cannot make changes as per the requirements and promises. Short-term investment is as like the voting machine in which company invest and run their business by thinking up that they will get more profits but changes in share prices and other factors can hamper this situation and their goals. On the flip side and in the context of long-term in which company invest for many years, so, asset prices and other psychology factors affect the performance of the company. Effectiveness of shares and outcomes depends upon the effectiveness and performance of the company as of an organization perform well, then their shares will do so (Afonso and Rault, 2015). If their company's business suffers than shares also have to suffer. There are several examples that shows that they get long-term achievements and give weight to their company such as: Starbucks who got a phenomenon success in turning coffee which is a simple product that used to be practically given away--into a premium product that people are willing to pay up for. It shows that the performance of Starbucks helped it out in getting handsome growth in the context of number of stores, share prices as well as profit. According to my view, I can say that in the type of short-term, market behaves like a popularity contest because stock prices rapidly changes on the environment and the whole and underlying value of the market and the company does not change. So, I can say that it is impossible to predict market psychology in an efficient manner, so a value investor should avoid getting on the short term fads. Frauds and fads fade out and get found out (Cacciatore and, 2016).

In addition, the difference between long-term and short-term run of business and business investment in the market can be defined with the example. If we compare short-term investment with voting machine than we can say that voting machine only counts votes which are based on the sentiments of voters and people. But sentiments of that people can change any time so, it becomes difficult to find out the value and measure effectiveness (Calandro Jr, 2016). On the other hand, a weighing machine is more concrete and real which shows accurate weight of a person. Value and the numbers shown by weighing machine does not change immediately but if it gets change a lot than there is a noticeable physical difference. So, it can be said that if a company invest for long-term than it can see the actual value of shares and the market and changes in the value is mainly depends on its activities and performance. So, I can clearly say that in the short-term, prices are driven by sentiments and in the long-term trends are driven by something which the company can measure in a concrete manner (Otuteye and Siddiquee, 2017).

Also Read:- Financial Ratios Analysis And Comparison of Enterprise

From the above and as per my opinion I can say that in the short-term, a change in value can be unpredictable as it uses quantifiable metrics and measure is done with immediate public sentiments. However, in the type of long-term, an equity prices will tend to change which is based on the underlying value of the company. It is being concluded from this statement and difference that long-term investment or weighing machine is more beneficial than short-term or voting machine for companies business (Nazarova and Dovlabdekova, 2015).

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