Similar to a car which moves at varied speeds during the course of a journey, the stock prices go through 4 stages
I have used some references from this story. Do check it out to easily grasp this one!
So what does stage analysis has to do with Harshad's story??
Read through...
Stage 1
What - Big players accumulate the stock at low price
Why - Institutions, Big players or even Punters:) want to earn the maximum ROI on their investment and have the financial and psychological capacity to buy volumes (Remember Harshad from the Tulip example)
Note : These players either know that the value of the stock will increase, have researched and found it undervalued OR they do not care about the value and have enough muscle to drive the price themselves They do not buy for 2x-5x returns. They want MEGA returns!
Stage 2
What - The price starts an upmove after Stage 1 of consolidation
Why - Once the supply is shrunk as all the stock was slowly bought at a low price , the price starts to increase as these big players start buying even more aggressively thereby driving the price up
Stage 3
What - Price does not move any further and becomes stagnant after months/years of upmove Why - The stock is on everyone’s radar and super-hot in demand. From the news stories to your local barber everyone thinks it is “ONCE IN A LIFETIME TIP” .
Now , the big players want an exit. They start selling slowly. Like distributing the inventory which they had hoddled. The price will not come down as there is demand and like Ashwin everyone wants to get their hands thereby giving Harshad a clean exit.
Stage 4
What - The price collapses and shocks everyone
Why - With all the inventory transferred to weak players, the price has no purchasing power backed demand causing it to collapse till the point where again big players want to accumulate it at a low price [Stage 1]
The smart players got the best ROI for their money with the not-so-smart ones left holding the bag!
The next read will show you How to Identify the Stage of a Stock in a super easy way!
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