The Stock Market
Welcome to my website!!!Nothing has changed the nature of investing as dramatically as the increased popularity of the personal computer. In fact, one might broaden that statement by changing the word “investing” to “mankind.” However, this site is not about mankind; it is only about investing.
Although, from my point of view, our culture is becoming increasingly affected by the way we invest. If you do not own a computer, you might feel like the world is passing you byand it is. Whether for good or for bad, the physical world in which we live has been intersected by a newdimension called cyberspace. If you do not know how to navigate in cyberspace, your familiar physical world may seem like it is shrinking. In a sense, it is. A growing percentage of the population has moved into cyberspace.Not all of the changes that computers are bringing to the way we invest are necessarily good.
There are tremendous benefits from the ready access to unlimited information and the speed with which one can take advantage of that information; however, there are also many pitfalls to all that information and speed. The most obvious is that the information is not always completely accurate. Sometimes online sources of information can be biased, and sometimes criminally manipulative or libelous. The speed with which investors can act on such information can be detrimental. Buying or selling a stock on a rumor that is spread over the Internet is not the best approach to a sound investment strategy; however, assuming that the source of the obtained information is accurate, online trading greatly benefits investors. There has probably never been a more important time than now for investors to have a good foundation of the fundamentals about how the securities markets work. For better or worse, online trading is a large part of the future of investing.
The great increase in the volume of trading over the last several years is due in large part to online trading. The problem is that so many people have access to so much information that they don’t really know what to do with it. That is what this site is all about. There are certain fundamental principles that apply to the way the stock market works. If you do not understand these principles, you will not know what to do with all of that information.
There is more to investing than simply buying the latest hot stock off the Internet. I build up this site to update information about online trading and to address some of the ways that this type of trading has changed the industry. The fact that online trading is increasing geometrically illustrates the significant need for this type of informationfundamental information on how the market works. Too many people are “dabbling” in the market without knowing what they are doing, and they are going to get hurt. The need for fundamental information about how the securities markets work has never been greater for individual investors than it is today. Probably one of the worst things that can happen to a novice investor is to be very successful very quickly. Making a “quick buck” in the stock market simply encourages a gambling mentality. Investors who approach the stock market with such an attitude have not learned the true meaning of investing. Wild profits made in the market with little or no knowledge about what you are doing will almost certainly be followed by quick losses, and the gambling cycle begins.
Now you have to make up your losses with more wild speculation. Such a gambler’s attitude toward the stock market will never result in a consistent winning strategy. Many people feel intimidated by the stock market. Since they don’t understand how it works, they don’t feel comfortable investing. They think that only professionals can understand the stock marketthose who speak the language of investing. This site should help change that perception. There are innumerable sites that give investment advice, such as when to buy stocks or what stocks to buy, but there are few sites that explain in nontechnical language just what the stock market is. What You Need to Know Before You Invest will help you understand how the market works and explain various securities that are popular with individual investors. It is written for the nonprofessional. You will find it much easier to understand than most other sites on the stock market, and it will help you to feel more comfortable with the investment process. I have been teached about the stock market for five years and have examined hundreds of texts and books on the subject.
In spite of the voluminous amount of material on investing, I have still to find one book that adequately introduces all aspects of investing to an individual who does not already have some background information. Most college texts are written for students who are in a business or finance program, and those who are not specializing in these areas generally find the material difficult to comprehend. Most books for the general population are written by professionals who cannot (or will not) bring the material down to the level of the ”common man.” This is truly unfortunate.
Basic information on the stock market is not difficult to understand. There is, however, a scarcity of nontechnical information on the stock market for individual investors. In any free enterprise economic system, an individual’s ability to participate in stock market investing is a right.
Indeed, the stock market exists because of this economic state. It is not the symbol of a free market system, it is the free market system. The word free implies that everyone is free to participate, not just business professionals. So, everyone should avail themselves of some fundamental information about investing. Your ability to capitalize on money-making opportunities should be limited only by the amount of your finances, not by your lack of knowledge.
Fundamental information about stock market investing should be presented so that everyone can understand it. Everyone should have access to the education they need to capitalize on investment opportunities, without having to get a college degree in business or economics.
What Is the Stock Market?
In many ways the economy is like a living person, probably most like a hyperactive teenager. The economy is a dynamic organism, ever growing, changing, and evolving. Like an adolescent, it can go through dramatic growth spurts that are usually followed by extended periods of lethargy. It is hardly ever static and it seems impossible to get it to just stand still. Economists, like parents, never come to a point where they can say, “Stop everything now. You are just perfect as you are. Don’t change a thing.” Whether they want it to or not, the economy is going to change. There is no way to stop it, and there is no way to predict exactly how it is going to grow. Also, the nature of the economy is such that there always seems to be a problem looming around the corner.
Everything is dramatic to the economy. It is continually confronted with one earthshaking crisis after another. Regardless of the actual size of the problem, it always looksominous. “This time its really different. Nobody understands me. I must be the most miserable economy alive.” Thus, economists who, as the economy’s parents, are responsible for monitoring its growthnever seem to know whether their charge is really exhibiting a relatively minor problem, which is easily taken care of, or if they are dealing with a potential catastrophe. It is difficult to tell whether that blemish is a simple pimple, problematic acne, or a cancerous lesion. It is usually difficult, if not impossible, to tell whether this problem deserves a Band-Aid, prescription medicine, or radical surgery. This uncertainty heightens the tension around the search for a solution to the problem. One can never be certain whether the proposed solution will solve the problem or even whether the proposed solution will address the problem.
In addition, the nature of the economy is such that the solution to every problem will always create another problem. If the problem is lethargy,an economist parent may recommend a strong dose of caffeine; however, the caffeine may create a whole new set of problems, perhaps superhyperactivity, requiring a prescription sedative. Also, there is the possibility that your mother was rightcaffeine really does stunt your growth;however, the real problem may not be simple lethargy. It may be manic depression, in which case a stimulant may only worsen the problem and
create an even deeper depression. Economists are continually trying to figure out what is wrong with their child, and blame each other for their lack of parenting skills. Their ward suddenly seems so foreign to them. “That child I thought I knew has turned on me. When did it go so wrong? What’s the matter with kids these days?” The stock market is a convex mirror to the economy. It reflects and magnifies every economic imperfection. When the economy looks good, the stock market looks glamorous. When the economy looks bad, the stock market can get downright ugly.
The fact that you can own stock in any one of the over 10,000 different domestic or foreign publicly traded companies means that you can directly participate in the fortunes or misfortunes of the economy. You can experience both its good and bad times. The stock market reacts with the same juvenile level of imitation that the economy does. “When it’s good, it’s very, very good; but when it’s bad, it’s horrid.” So, what is the stock market, really? It is a place where shares of stock can be exchanged from one owner to another. An exchange does not create new stock. It is simply a physical location where buyers of securities can find sellers and where sellers can find buyers. “Securities” is a broad term for investment instruments issued by businesses, usually corporations.
Securities are available through broker/dealers and would include stocks, bonds, and several other types of investments. You may have heard someone say, “The market was up today because there were more buyers than sellers” or it was down because “there were more sellers than buyers.” These statements are misleading. There are never any more shares bought than were sold, or sold than were bought. Every time you buy a security, another investor in that security has sold it to you. Every time you sell a security, another investor buys it from
you. This is true of all securities except those that are sold on the primary, or new issue, market, which will be discussed in one of the next pages. So, you should realize from this description of stock market transactions that an exchange does not create a security. It simply represents the interests of buyers and sellers. If supply is high and demand is low, the price per unit of a commodity will remain relatively low. As demand increases, supply decreases, and the price per unit goes higher. Only at the point where the supply is equal to the demand, where the two lines cross, will the price of the unit remain stable. Relating supply and demand to the stock market, every company has a relatively fixed number of shares available for investment.
This number is said to be relatively fixed, because within certain limits a company can sometimes issue more shares, such as by giving perks or bonuses to employees through profit-sharing plans or stock options. Under no circumstances can a company issue more shares than it is authorized toissue. So, since there is a limited supply of shares available, the more motivated investors are to buy these shares, the higher the price they are willing to pay for them. This demand will drive the price higher.
As demand increases, the price will increase because supply is limited. The more motivated investors are to sell a stock, the lower the price they will ask for their shares. So, stock prices tend to follow this same pattern illustrated by the supply and demand curves.
