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How the Stock Market Works

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Re: How the Stock Market Works

#51

Post by abbasaamer »

kelnos wrote: post #32

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...…

For anyone who is really looking to understand how the stock market works, I would recommend picking up a copy of "Trading and Exchanges: Market Microstructure for Practitioners" by Larry Harris.

Re: How the Stock Market Works

#52

Post by fathead_glacier »

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?

The Gini coefficient will give you a measure for the statistical spread of GDP per capita and is used to measure inequality. [1] Taking the time series of the Gini coefficient and the GDP will show the growth for a percentile of interest.

[1] https://en.wikipedia.org/wiki/Gini_coefficient

Re: How the Stock Market Works

#53

Post by fitech »

I think there is a desire among people to have a simple guide to what markets are and why they exist, so I applaud the author on the idea and the intent.

However, many of the ideas are misunderstood. A couple months of playing around with a stock trading app and maybe reading some blog posts will not teach you what markets are or why they exist.

For quite some time, a significant amount of brain power has gone into understanding and improving markets. All of this work has resulted in significant complexity.

If I had to pick a place to start, were I to teach someone "Everything they ever wanted to know about the stock market," It would actually be with bonds. Lending money has been around for millennia. It is an amazingly simple, yet incredibly useful, idea. It's also extremely useful as a way of teaching someone about equity. Bonds and equities are intricately linked in their development and in the theory of valuation.

Re: How the Stock Market Works

#55

Post by onion2k »

rlayton2 wrote: post #10
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.

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

shares can occasionally give dividends

Shares don't give dividends. Companies give dividends. Shares are just how they work out who to give the money to.

Re: How the Stock Market Works

#56

Post by Iv »

jstanley wrote: post #37
bonestamp2 wrote: post #18

Earlier quoted context omitted.

> 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.

My proposal is to randomize the order at which orders arrive. Market makers are largely algorithms by now anyway.

Send orders all day, clear them once a day. Calculate the resulting quote.

Let go of the illusion that the real value of companies change every nano second. The fact that stock exchanges close at night and that for 12 hours, values don't change proves that it is not a necessity.

Having 12 hours instead than a few seconds to think about the impact of a given news on the stock market is going to give room to breath for actual investors.

Re: How the Stock Market Works

#57

Post by burroisolator »

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.

Perhaps my argument can be simplified as follows. If everyone had the same models, they would pick the investment with the highest ROI adjusted for risk (ignoring externalities). That same investment is now not available for someone else: they now have to take the second best.

Re: How the Stock Market Works

#59

Post by Iv »

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?

Increasing inequality is a problem I consider very important for the progress of mankind, but I just want to point out that in this discussion on this specific topic, the share of GDP is not what is important. The absolute number (in PPP) is what we want to look at.

Re: How the Stock Market Works

#60

Post by burroisolator »

fathead_glacier wrote: post #52
burroisolator wrote: post #30

Earlier quoted context omitted.

> 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?

The Gini coefficient will give you a measure for the statistical spread of GDP per capita and is used to measure inequality. [1] Taking the time series of the Gini coefficient and the GDP will show the growth for a percentile of interest. [1] https://en.wikipedia.org/wiki/Gini_coefficient

I guess I'm searching for a graph that has time on the x-axis and (real gdp * % of income that went to the bottom z%) on the y-axis for 5 ~ 10 different values of z. And hopefully it trends upwards for all values. I'm just surprised this isn't something that economists have already thought of as it feels like it would be the most important GDP-derived metric. Or at least "GDP per capita on median" if that makes sense.
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