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How the Stock Market Works

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Re: How the Stock Market Works

#31

Post by wangarific »

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.

It's less about being "smarter," it's really about identifying your advantage and understanding whether you can exploit it. This could be something as obvious as an information advantage (insider trading) to simply having more time/patience. If you can buy and hold for decades, you can wait out the bumps, the people who are forced to sell, and for more money to enter the market.

Re: How the Stock Market Works

#32

Post by kelnos »

I was expecting something a lot more detailed. I got to the end and was wondering if this was the first part of a series, since it's nowhere near "everything" anyone would want to know about the stock market. It's barely an introduction.

Then there are the inaccuracies. Zero-sum game? No. Derivatives are "a bet on the rate of change" in value? No. Brokers "help you execute a trade at the best possible price"? Well... not really. The NYSE is a "one stop shop" for people who want to trade? Um, NASDAQ? Any number of non-US exchanges?

Overall, very disappointing.

Re: How the Stock Market Works

#33

Post by aeternus »

burroisolator wrote: post #20
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 b…

This is not really true. The market overall works as a surprisingly efficient resource allocation engine. Onions aren't a great example as they are a commodity rather than a stock.

Regardless, if someone does bid up the price of onions, it will typically trigger increased production of onions as farmers can make more profit by growing onions vs. another vegetable. This increased supply will pull the price back down.

Re: How the Stock Market Works

#34

Post by gchokov »

gjvc wrote: post #9
gchokov wrote: post #3

Earlier quoted context omitted.

You are partially right. What you miss is that there are the so called market makers - exchanges that ensure liquidity. They buy from you and sell to you while managing order books. These are simply trades records that have a key role in determining the price pressures for it go up or down.

> exchanges that ensure liquidity "market participants" which provide liquidity on an exchange.

The exchange itself has a goal to ensure liquidity. Do you really think all your orders are instant because there's somebody on the other side to buy it? I mean, yeah, right - for the very common stocks this is the case, but what about those low liquidity stocks that are still being executed instantly?

Re: How the Stock Market Works

#35

Post by H8crilA »

1e-9 wrote: post #27

"Just like how taking the derivative of a function gives you the slope, a derivative in finance is a bet on the rate of change of the value of a stock, or a bond, or an index." 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.

Derivatives is a difficult to asses market, in terms of size. For example, the largest derivatives markets out there - interest rate swaps - trade contracts that usually have ~zero net value at the beginning of their lives, when the sides open the contract. Derivatives typically start small and sometimes end up huge.

The investable universe looks something like that:

https://imgur.com/a/68U3LsZ

Re: How the Stock Market Works

#36

Post by H8crilA »

aeternus wrote: post #33
burroisolator wrote: post #20

Earlier quoted context omitted.

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 b…

This is not really true. The market overall works as a surprisingly efficient resource allocation engine. Onions aren't a great example as they are a commodity rather than a stock. Regardless, if someone does bid up the price of onions, it will typically trigger increased production of onions as farmers can make more profit by growing onions vs. another vegetable. This increased supply will pull the price back down.

The same happens in the stock market, increased demand (roaring stock market) eventually produces new equity (IPOs). But it doesn't necessarily mean that the new equity is of identical quality (ex: 2000 boom IPOs like Pets.com, or Uber - though we still don't know if Uber is a good stock or not; check back in 5-10 years).

And in the credit market - after all the good debtors are served, and there's still demand for new credit - bad debtors start being served. This keeps on going till it bursts (like in the housing bubble).

Re: How the Stock Market Works

#37

Post by jstanley »

bonestamp2 wrote: post #18
Iv wrote: post #15

Earlier quoted context omitted.

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 d…

Even if you only update the order book once a day, you still need some way to decide which of 2 orders at the same price gets in front of the other, so people still have to compete on time, except now the prices are worse in both directions because market makers have to be able to commit to the price for the entire next day.

Re: How the Stock Market Works

#38

Post by [deleted] »

burroisolator wrote: post #30
Iv wrote: post #15

Earlier quoted context omitted.

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…

> Real GDP per capita grows. 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?

[deleted]

Re: How the Stock Market Works

#39

Post by H8crilA »

fsloth wrote: post #21
rlayton2 wrote: post #10

Earlier quoted context omitted.

Yeah, I don't think it is true - as a secondary function, shares can occasionally give dividends.

Funny you say as a 'secondary'. Dividends are the main reason I personally like stocks as long term investment.

According to Rober Shiller's long term data on the American stock market - from 1871 to 2019 the stock market advanced by 2.323% yearly on average without dividends, and 6.836% yearly on average with dividends reinvested. Both figures after inflation. That amounts to total gains of 2'900% and 1'780'000%, respectively.

https://dqydj.com/sp-500-return-calculator/

Dividends make a massive difference. It's in fact not a secondary but a primary driver of long term profit.

Re: How the Stock Market Works

#40

Post by ww520 »

Not understanding why this blog is so highly upvoted. It's just poorly written. Someone starting trading on Robinhood is just screaming I'm a financial newbie.

Is the market peaking? With so many clueless entering the market. Where would be the next herd of new blood?

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