21–30 of 73 posts
“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.
Yeah, I don't think it is true - as a secondary function, shares can occasionally give dividends.
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.
It can get a little more complicated than that though -- you might be trying to sell 1000 shares and the highest bid might only be for a quantity of 500 so the "market" price for your first 500 shares will be different than the next 500 (unless there are other bids at that same price, which there often are but there's no guarantee on the volume you'll be able to sell at that price).
And that's why they call it a stock exchange... it's just a bunch of people (and companies) making bids and offers to "exchange" stocks at difference prices. When a buyer and a sell agree on a price, you have a transaction (trade). Your offer to sell at market price is just an agreement between you and someone else willing to buy at that price.
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.
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.
> derivative in finance is a bet on the rate of change of the value of a stock
No. At least no more than an equity is also based on the change in value of the company. At best it is just a terrible way to describe it. It is a derivative because it derives it's value from the underlying. You can get rid of the "rate" part and it would be more correct.
> The New York Stock Exchange is a company that maintains a database that is a one-stop shop for people who want to trade stocks and other fancy financial instruments.
Don't even know where to begin with how misleading that is.
> that is a reflection of a section of the stock market performing “well”, in the sense of investors making money4 on their stock investments.
Not really. It is the value of the companies going up. I'm sure many are losing money too in both a real sense and a "I shouldn't have have sold" opportunity cost regret.
> Depending on what the Fed’s interest rate is, you could conceivably buy a bond off of somebody for lesser than the principal.
Nope. The feds target overnight rate has very little to do with how bonds outside the very short end, and nothing to do with the long end most people would be buying.
> It’s a zero-sum game, because there are always winners and losers in the stock market.
Not really. While each individual trade is zero sum, the collection of them creates more efficient capital flows and helps they health of the market in a very general sense. Without the traders, the market would dry up and nobody would make any money from it.
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.
No. That is just completely wrong. A derivative is a financial instrument that derives value from other things.
As an aside, the derivatives market is far bigger than the stock market.
You have 100% at any given point, where does it go? Not buying anything is going 100% cash. That's why you have to do it - you're always in some exposure.
Then you can always lever up securities, effectively going negative on cash. Example: 105% stocks, 195% long term bonds, -200% cash can be achieved by going 35% UPRO, 65% TLT; only for the brave souls among us that do not fear a 300% leverage. This is roughly how the Bridgewater All-Weather Fund operates (AFAIK you can choose your leverage level there).
Many households are quite levered up by getting a mortgage. A mortgage with downpayment of 20% results in 1/0.2 = 500% leveraged exposure to the real estate market (slowly declining over time as the principal is paid, or if the house appreciates in value).
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.
Buying at market price simply means you immediately buy from the seller offering the lowest price.
It's very rare for an order book to be empty for a particular stock, but you typically do see the bid/ask spread increase as a stock loses popularity.
“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…
Do you know if the share of real GDP for the bottom 10% (or in general, bottom x%) of consumers grown? And is there a well-known term/metric for this?