Price is only the perception!

When a share market collapses and we hear that investors lost lakh and crores of rupees, where do the lost lakhs and crores of rupees go? Who is the actual beneficiary?

Firstly, let us understand something fundamental.

 

‘Price’ of anything is actually more of a perception. Yes, you read it right, ‘Price’ of a commodity is influenced by how it is perceived by the interested people.

 

Let me explain this with these four cases,

1] Bottled mineral water in a desert:

 

In a barren desert where there is nothing but sand everywhere and not a single drop of water, how much would you pay for a bottled mineral water? Rs. 50? Rs. 500? or may be even Rs. 5000! So, the price here is say Rs. 5000.

 

2] Bottled mineral water at an airport:

 

At an airport, everything is sold at a premium. A regular mineral water bottle can be easily sold at a price of Rs. 50 here. So, the price here is Rs.50.

 

3] Bottled mineral water purchased from a regular retailer:

 

The same bottle of a mineral water can be easily bought at Rs. 20 from a retail shop. So, the price here is Rs. 20.

 

4] Bottled mineral near a river:

 

If you try to sell a mineral water bottle near a river which has water as clean and as drinkable as this, you would fail to have even a single customer. There is no point of paying money for water when you have so much of water available all for free. So, here the price is Rs.0.

 

You see, in all these four cases, we are trying to evaluate the price of the same thing: ‘A bottled mineral water’.

 

From Rs. 5000 it dropped to Rs. 50 and then to Rs. 20 and lastly to Rs. 0. In all the situations, the bottle never changed but the price did change as the factors and the environment changed.

 

If I ask you where did the money go if the price dropped from Rs. 5000 to Rs. 50? or from Rs. 50 to Rs. 20? or from Rs. 20 to Rs. 0?

 

The answer to this would be it did not go anywhere. Just that the perception of the price has changed owing to the factors around it. Price fluctuation is therefore only a notional thing here, as the underlying commodity is the same: The bottled mineral water.

 

So, to sum up we can say that:

 

Price of a commodity changes if we change the factors which can impact its ‘demand’ and ‘supply’.

Price fluctuations are notional. In simple words, people perceive the same commodity in a different way in different situations and hence the price is bound to change. No one loses a penny unless one actually buys at a higher price and sells at a lower price.

The same happens in case of a stock market collapse.

 

For Example, the shares of Yes Bank were trading at Rs.400 few days back. There were few developments which dragged the share price to below Rs.200. Now you see, if I had one share of Yes Bank at Rs.400 and now the price is Rs.200 then, I do not lose my money unless I sell the share in panic and actually book the loss.

 

Price is only the perception here. People who thought to value Yes Bank at Rs.400, after few days gave it a value of Rs.200. This is because the factors changed for Yes Bank as it did for a bottle of mineral water when we changed its situation from desert to a retail shop.

WhatsApp-2.12.351-WhatsApp-Messaging-App

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: