Economics : Share Trading

Ahm97sic SG

For H2 and H1 Economics students and others to practise,

Application of Demand and Supply Theory to Share Trading.

In the stock market, when share buyers want to buy the share of a company eg SPH, they can join the buy queue eg they want to buy 100,000 shares at $3.70 and when the share sellers want to sell the share of a company eg SPH, they can join the sell queue eg they want to sell 200,000 shares at $3.71.

Buy Queue Buy Price Sell Queue Sell Price

100,000 $3.70 200000 $3.71

Questions

(a) If the buy queue is decreasing, what does this mean ?

This means that sellers are selling the SPH share to the buyers at $3.70

If the buy queue becomes zero, will the SPH price rise or fall ?

When the buy queue becomes zero, there are no more buyers who

want to buy the SPH share at $3.70, the sellers will have to sell

the share at a lower price ie $3.69

(b) If the sell queue is decreasing, what does this mean ?

This means that buyers are buying the SPH share from the sellers at $3.71

If the sell queue becomes zero, will the SPH price rise or fall ?

When the sell queue becomes zero, there are no more sellers who

want to sell the SPH share at $3.71, the buyers will have to buy

the share at a higher price ie $3.72

the buy queue ?

(d) Discuss the possible factors that can lead to the increase and decrease in

the sell queue ?

(e) If an investor has monopolistic power ie the investor owns a large amount of

SPH shares, how could the investor manipulate the share price of SPH and

profit from it ?

Thank you for your kind attention

Regards,

ahm97sic

eagle SG

Dear Ahm97sic,

for a,b,c,d, it can all be related to e

queues formed in the market could be a result of market manipulations as well. It's not as simple as demand and supply. Applications of H2 economic theory to real life trading would kill.

Let's say a big investor has infinite amount of SPH shares. He/she can manipulate it such that a price ceiling and floor is formed between 3.7 to 3.71, such that buyers can only buy at 3.71 and sellers at 3.7... Normal retail investors/traders will not have sufficient monetary power to move the price. This big investor can then accumulate at this price, and maintain the price by selling 1 lot to himself at 1 minute time intervals, so as to make a show that the price is being maintained at 3.7...

Subsequently, this big investor can arbitually move the price floor and ceiling up, to say 3.9 to 3.91. In doing so, he has artificially created a higher price for himself, while 'conning' the psychology of newcomers that all is well, and more upside is coming, so it's time to buy.

A better discussion topic for now, I would say, is the implications and consequences of Singtel having won the BPL rights instead of Starhub, and discuss whether competition within oligopolies are always beneficial to consumers.

Ahm97sic SG

Dear Eagle,

The use of share trading to apply demand and supply theory is used to inject an element of fun/interest to "A" level economics students who may find economics boring and uninteresting.

Indeed, I agree with you totally that application of H2 economic theory to real life trading would kill.

I always highlighted to the students at the end of the lesson that what they learnt in the simple share trading example is only the basics and I will then provide them with the print and online resources (eg where to have real online trading with virtual money, online trading tools, books on technical analysis, fundamental analysis and so on) to learn more about share trading.

I also explain to the students how big investors who can manipulate the share price of a company which makes the theory of demand of supply ineffective in share trading.

Regards.

ahm97sic

PS : The market for cable TV is too small in Singapore. This may be again the case of natural monopoly for cable TV in Singapore as the market might not be big enough for two cable TV firms to remain profitable. So, the current situation is the duplication of resources eg 6 TV boxes to watch sport programmes - 3 from Singtel and 3 from Starhub. In the end, this will lead to losses to both firms and the eventual merging or buyout and the eventual of one firm in order to remain profitable.

It is the same for TV broadcasting firms. In the past, MDA allows competition and hence the existence of Mediacorp and SPH-TV. After a period of intense competition which results in huge losses for both firms. MDA finally realises that it is a natural monopoly case for TV broadcasting for Singapore and hence the 2 firms merged ie the market for TV broadcasting is just too small for 2 firms to remain profitable.