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How the Stock Market Works

shashankr.me

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Re: How the Stock Market Works

#11

Post by skybrian »

revx wrote: post #2

Great article, thank you. I still don't understand who buys and sells stocks. Is there just that much volume that if I decide to sell at a certain market price, there's guaranteed to be a buyer? Or could I decide to sell at market price but nobody actually accepts the transaction? There's some financial magic at work here that I don't quite understand.

"Market makers" ensure that at any time, there are standing orders to buy/sell that are close to the current market price (the difference is called the spread). If you buy/sell at market price, you are taking an existing offer at their price.

You could also do what they do. Instead of buying immediately at market price, you could enter a lower price and create a standing order to buy at that price. However, if the price goes up, you might miss out on buying the stock at all.

Similarly for selling. You can enter a higher price, but it won't sell if the market price doesn't go up.

Conceptually this isn't so different from what a grocery store does. They offer something for sale and wait for a buyer willing to pay that price. However, margins are much lower and prices change much quicker for stocks.

(Note: I'm not recommending messing with any of this.)

Re: How the Stock Market Works

#12

Post by unicornmama »

AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

No, it’s idiotic. Companies in in aggregate enjoy earnings growth. Ergo why what you buy today is worth more tomorrow.

Re: How the Stock Market Works

#13

Post by MacroAffairs »

AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

Even for options it doesn't have to be zero sum.

E.g. you could give someone insurance on their stock position if you can take the risk. This allows them to participate in the game so you both benefit.

Another is that you might be able to lend more cheaply than the other can loan but they want to leverage up their portfolio. With options you can effectively make a cheaper loan to them to purchase a specific product. They lend more cheaply, you make part of the spread.

Re: How the Stock Market Works

#14

Post by rockinghigh »

AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

It’s not true in absolute terms: for example during a bubble or an upward trend everyone wins. However, if you only consider excess returns (return - some average return), or look at certain derivatives then there are situations where some winning positions require equivalent losing positions.

Re: How the Stock Market Works

#15

Post by Iv »

AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

The economy is not a zero-sum game and that's something I wish more people understood. Real GDP per capita grows. The average US citizen has access to more intrinsic values that aristocrats had just a few centuries ago.

However, he may be talking about pure trading, a.k.a speculation, which is very close to a zero-sum game. If you are not in for the dividends, yes, that's close to a casino where the banks who charge for transactions are the inevitable winners.

I wish we followed Warren Buffet's advice and forbid to sell a stock less than 6 month after buying it. I also don't see any interest in making the stock prices change every nano second. A quote a day can be enough if you are an investor, not a speculator.

Re: How the Stock Market Works

#16

Post by Fnoord »

thesumofall wrote: post #6

I think the one important lesson that is missing here is: never ever try to be smarter than the market except you have money to lose and you like to gamble.

Depends. You can invest low risk (yielding say only 5% yearly profit). If a big company which is supposedly stable falls (such as Morgan Stanley) you may get lose a little but since you spread enough not so much.

You get income than the interest from your bank this way. While in EU you get guaranteed 100.000 EUR when a bank collapses, but if shit really hits the fan (crisis, many companies collapsing, EUR or USD losing a lot of value) you are toasted regardless.

Re: How the Stock Market Works

#17

Post by chepaslaaa »

AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

all the people who labor and can't afford stock lose to inflation in this paradigm

Re: How the Stock Market Works

#18

Post by bonestamp2 »

Iv wrote: post #15
AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

The economy is not a zero-sum game and that's something I wish more people understood. Real GDP per capita grows. The average US citizen has access to more intrinsic values that aristocrats had just a few centuries ago. However, he may be talking about pure trading, a.k.a speculation, which is very close to a zero-sum game. If you are not in for the dividends, yes, that's close to a casino where the banks who charge…

> I also don't see any interest in making the stock prices change every nano second. A quote a day can be enough if you are an investor, not a speculator.

Well, there isn't any interest in it per se, but that is intrinsic to how fast we can make trades... Somebody offers the lowest sell price and somebody offers the highest buy price. The "value" constantly changes as those two highs and lows fluctuate based on who decides they'll sell for lower than the lowest offer or who decides they will buy for higher than the highest bid.

Unless you're saying that those offers/bids should only be accepted once/day and can't be changed until the next day? That's the only way I could forsee changing the quote once/day.

Re: How the Stock Market Works

#20

Post by burroisolator »

AznHisoka wrote: post #7

“It’s a zero-sum game, because there are always winners and losers in the stock market.” Is this true, outside of options? Most people are long and the stock market has always been on an uptrend.

There is a zero-sum game in the some sense if you focus on potential buyers. If you buy out all the onions in a grocery store (and continue to do so once they restock), eventually the grocery store is going to start raising onion prices. Thus anyone purchasing onions after you will suffer a slightly higher price. In theory, the long term price of a stock should be the sum of its discounted future cash flows. If you bid up a stock through purchases, anyone who wanted to purchase the stock after you (assuming your decision to purchase did not affect their decision) will suffer a slightly higher purchase price, most likely leading to reduced future gains. Liquidity is gained for any sellers.
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