The stock markets are down in the dumps again and as is usual in situations like this, experts are out in thick numbers, explaining why stock prices are heading south again. One of the commonest comments is that buyers have vanished. I doubt whether too many people take this as being explanation, but it’s something that is offered by everyone from the junior-most johnnies at broking firms all the way up to the heavyweights on the business channels.
Taken literally, this statement is not true. In fact, it’s little more than a figure of speech. This is something that is clearly evident to even the most naïve analyst. If there’s selling, then there must be buying and by definition there must be equal amounts of both. Then why does everyone say this? Perhaps there’s less of both when prices are declining. As it turns out that there’s broadly a little less trading when a scrip is falling but not a lot less.
For example, take the DLF stock, which is an excellent example be-cause it falls often and with great enthusiasm. Since it was listed, its average volume on days that it fell has been around 78 million a day. On days that it rose, the figure was 83 million. This scale of difference is maintained across most stocks across different time periods. For stocks, volumes drift lower when there are long periods when markets are stagnant. This is hardly something that comes as a surprise.
What people actually mean by there being no buyers is that the sellers are unable to find buyers at the prices they’d want and that the prices are led by sellers and buyers. In effect, there are not enough buyers. In this sense, stock prices appear to be like election results in a parliamentary democracy. Relatively large swings in seats results from small changes in the number of votes that different parties get. Similarly, large shifts in prices and sentiment result from a small shift in how many people are willing to buy and how many are willing to sell at different price ranges
This column first appeared in The Economic Times on January 31, 2011