when there are many buyers in the market who do not have the ability to influence the commodity's price.
Details of Polyspony
This term is typically used to describe the stock market. No one buyer is large enough to drastically increase or decrease the price of any one commodity. Supply and demand are codependent factors and result in market values that benefit both sellers and buyers.
When prices rise on a stock, it can only rise so far as the market will allow. Eventually, the stock price will rise to a point where buyers are no longer purchasing. The price will then lower until buyers are willing to purchase sustainably. The lowering of values works in the same fashion. If a value falls too low, sellers will not sell. Instead, they will hold asset. It is in this way that a market finds a balance in prices.
In polyspony, supply and demand do not operate as normally expected. No one buyer is strong enough to permanently change the value, regardless of the demand. When a buyer influences stocks, the values tend to stay within a window of value that appeases both buyers and sellers.
There is one exception to this rule. Banks or pension funds are large enough to buy and sell at a volume that could affect markets. Mutual funds also can affect a market value. Mutual funds are large investments made of many stocks and can be bought and sold as whole units. This can create a sudden buy or sell-off of one commodity which would shift supply and demand rapidly. Therefore, it has the potential to shift the market temporarily.
Example of Polyspony
Jerry was a stockbroker. Jerry saw that shares in his favorite tech company were low and decided to make a good investment. Jerry bought 200 shares. Jerry waited for the shares to rise in value, but the shares held their value over the next few weeks.
Two months after the shares first dropped and Jerry was able to buy, there was a renewed interest in the tech company. More buyers were flocking to the company. Stocks began to rise rapidly. Jerry saw the value of his new shares rise rapidly, and he celebrated his profit.
Soon, shares rose high enough that the price began to plateau. Jerry sold his shares and put the profits into his retirement account. While Jerry's initial large purchase of stocks did not immediately create more demand, a larger community did increase prices for that stock. This created opportunity for Jerry to make a profit.
Significance of Polyspony
The concept of a polyspony is significant in the stock market because it is an example of supply and demand fundamentals. Individual buyers do not have the power to dramatically shift the market. However, many smaller buyers acting as one do. The balancing of these forces is what holds the market stable. Stockbrokers must understand this concept before they can fully understand the market they hope to predict and profit from.