A beginner's guide to investing starts with learning how the markets work.
Is learning about the stock market difficult?
What is the stock market?
How does the stock market work?
The stock market can be extremely complicated. But it doesn't have to be. You can make money in the stock market without having to know every detail, term, or concept.
You can learn the stock market and the basics of stock market investing and be quite successful without getting involved in the entire stock market lingo.
Even Alan Greenspan, the former Chairman of the Federal Reserve Bank, said he didn't understand some of the things that happened with the credit default swaps. Those were some of the instruments that created the financial meltdown. Also, studies show that on average about 80% of all mutual funds do worse than the market average every year.
The studies also show that the 20% that do better than the market average, do not repeat the next year.
So if Alan Greenspan doesn't understand all there is to know about the stock market, you probably don't need to worry about paying attention to all of the confusing terms that you may hear about.
Now to help to understand what is the stock market, we need to take a look at other markets.
Since the beginning of time, humans have bartered, traded, bought, and sold "things". A caveman facing winter would be in desperate need for animal hides in order to keep warm. The caveman's neighbor might have plenty of hides, but the neighbor needs arrows.
The two cavemen work out a trade - one gets animal hides, the other arrows.
We still do the same thing today even in the stock markets.
The only thing that really has changed is the structure.
If you want to know what is a stock, it is defined here.
The Grocery Store is a Market
For example, the supermarket or grocery store is an example of a market. The supply of these goods is practically speaking - unlimited. The structure of this market is one where the prices on all goods are fixed.
You can't pick up a loaf of bread that is priced for $2.50, take it to the check out, and say: "I don't want to pay $2.50. I'll give you $1.75." The cashier would look at you like you had lost your mind.
This is a case where prices are fixed. Shoppers have the choice to pass on items they consider too expensive.In this example there are fixed prices, many buyers, and only one seller.
Prices are fixed. There are many buyers. The supply of goods is unlimited. There is only one Seller which is the store.
There are also other structures for buying and selling. One of those structures is the auction.
In this example, let's assume that the ruby red slippers worn by Judy Garland in the Wizard of Oz are going to be "auctioned off".
There's only one pair of slippers. Who wants to buy them? How much are they willing to pay? Let's also assume that five hundred buyers show up and actively try to buy these shoes. What happens? The price goes up until only one person is willing to pay enough. Only then is the sale made.
Prices are not fixed. Buyers compete with each other, because the supply is limited. There is only one seller.
Farmer's Market or Bizarre is another market type
The next market type is one like a farmer's market or flea market.
In this market there are many buyers and many sellers. We will also assume that the supply of goods is unlimited.
Here buyers may choose from several different farmers selling tomatoes. Farmers (sellers) may be willing to negotiate on price. So before a sale is made,both farmer and buyer have to agree on price. This happens on every sale.
Farmer's Market Structure
Prices are not fixed. Buyers and Sellers compete.
OK, now we are finally what you've been waiting for - the Stock Market.
I think the stock market should be called the stock auction. Every day the stock market is just a long auction.
It is unique in that both buyers and sellers are competing against themselves and everyone else. The Sellers are selling because they believe that prices are going down. Buyers believe prices are going up. Every second of everyday sellers are selling, and buyers are buying when the market is open. Prices are constantly changing. And yet somehow among all of the screaming and yelling deals get done.
The stock market is a place where buyers and sellers are constantly competing and everything is in a state of change.
Here is a very old but very good cartoon from the 1950's explaining both how stocks and stock markets work.