Why is stock market so unpredictable?

Answer

4 years ago

Stock markets are like any other market. Buyers and sellers are always trying to use the information to continuously define the value of every stock traded in the market. You need to qualify your statement saying that stock markets are unpredictable in the short term. In the long term, stock markets have created value in India and are generally more predictable. That is obvious from the fact that a SIP in an equity fund over the last 15 years would have generated very attractive returns. But yes in the short term the markets are unpredictable.

Here is why.

Value of a stock is a matter of judgment. Two analysts or investors can look at the same stock differently. For example, for a short term trader, autos may look risky and he may want to sell these stocks. But the long term investor will say that “Here is a sector that has tremendous potential and available cheap”. The long term investor will therefore go and buy the auto stock. This difference in perception is one of the key reasons for volatility.

Man and machine are competing in the stock markets. There are human investors and traders active in the market. There are machines with high end co-located servers and superfast algos that are also active in the markets. This variation in investment methodology also creates volatility in the market.

Stocks are also volatile and unpredictable because of the continuous flow of news, announcements, international data points, etc. Today the Indian market is not just impacted by earnings and domestic macros. Factors like US rates, European liquidity, politics in the Middle East, Chinese currency all have an impact on the Indian markets. These triggers are hitting the market 24X7 and making them unpredictable and volatile.

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4 years ago

So often we all try to sit down and try to predict the level of the Sensex and the nifty after 1 year or 3 years. More often than not, these projections are absolutely not worthy. Frankly, nobody knows where the nifty is going to be after one year because the nifty by itself is not an asset class but it is just an aggregation of asset classes.

There are too many factors at play behind the indices and therefore taking any kind of calibrated view on the index is hard. Even when it comes to stocks, nobody knows what the bottom of individual stocks or the top is. You only have an indication of value.

Why? The reason is quite straight because the stock market cannot be controlled by anyone. We humans can predict events that are under our control. However, one can attempt to predict the markets using a plethora of factors that directly connect with market i.e control them.

One important factor that affects markets nature is emotions. Market sentiments affect the price of the stock along with other reasons.

I would say, If you succeed in trading and investing then it is the first basic evident that you possibly predicted the market right.

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4 years ago

From a common means view of the stock market can be explained as a rubber sheet which is held on from all sides by people. As people pull, the sheet will expand and then pull the person on the other sides in. The rubber sheet has no fixed shape and our gets defined as people pull out. The same manner, the condition of the market is defined by people. Since people can be unpredictable, the market reflects it.

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