Let’s start from the beginning. There is no one market when we say financial markets. It is a vast network of millions of traders aiming to generate profits by buying and selling anything we can think about.
THE SECRET OF UNDERSTANDING THE MARKET: IT HAS NOTHING TO DO WITH BEING RIGHT OR WRONG
Everyone who faces the market for the first time is usually scared because of plenty of information coming around. The idea is that all the information influences price movements. A trader should notice how the information will influence and decide on the right moment what action to take.
It is not okay to say that prices are ‘right’ or ‘wrong’. Prices are too cheap or too expensive. Suppose you were the trader in the stock exchange. When he has that feeling that a stock is underpriced, he will jump and buy it. When he buys it, his purchase will raise the value of the stock and push its price to go up.
On the other hand, if the trader feels that a stock is too expensive, he will sell it. His action will command the asset price to go down. This is how supply and demand rules markets.
The point is that there is no one trader thinking and acting. There are millions of traders who use computers and trade through trading platforms. There are millions of dollars flowing in a second, and the market is adjusting to their actions. The little secret is that the stock market allocates the capital. So, the stock market exists to determine the price of a stock based on how many people are willing to pay for a piece of a company.