
How the Stock Market Works - blrboy
http://shashankr.me/2019/07/27/everything-you-ever-wanted-to-know-about-the-stock-market-but-were-too-afraid-to-ask.html
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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.

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evrydayhustling
Bond market is off too - bond writers don't set the rate, they just describe
the payment schedule and auction it off. Market determines a price, which
implicitly sets the rate.

It seems like an earnest effort by the author. I'd encourage them to find a
pro to run this piece by as a further learning experience. When you stop
getting edits, you are ready to teach a simplified version to others!

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1e-9
"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.

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H8crilA
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](https://imgur.com/a/68U3LsZ)

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jnordwick
This whole article is terrible:

> 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.

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AznHisoka
“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.

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Iv
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 for transactions are the
inevitable winners.

I wish we followed Warren Buffet's advice and forbid to sell a stock less than
6 month after buying it. 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.

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burroisolator
> 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?

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fathead_glacier
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](https://en.wikipedia.org/wiki/Gini_coefficient)

~~~
burroisolator
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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revx
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.

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gchokov
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.

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gjvc
> exchanges that ensure liquidity

"market participants" which provide liquidity on an exchange.

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gchokov
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?

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thedufer
The exchange can't trade on their own platform, it would be a massive conflict
of interest. The liquidity is typically provided by market makers, who are
given incentives to do so. They also get to capture the spread, which is
itself fairly valuable. You don't need a conspiracy theory to explain it.

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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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H8crilA
One thing that you have to in your life is to choose your risk exposure to
typical assets: cash, bonds (in particular long term bonds), stocks, real
estate, and maybe commodities (like gold, or maybe Bitcoin for the
courageous). Sharpe ratio is a good way to measure risk/return.

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).

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im3w1l
Mortgages have the advantage that you can't get margin called at an
inopportune moment.

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jacobkranz
I heard through a realtor / friend that during '08 there were some home equity
loans that were called back though. I don't know the exact details of those
who had their HEL's called but my friend stressed that mortgages would never
be called back (unless capitalism collapses) but HEL's _could_ be even if
you're making on-time payments depending on terms.

~~~
tomatocracy
It's also not uncommon to see maintenance (ie tested every x month, not just
on initial borrowing) loan to value covenants in commercial Real Estate
lending, including at quite small scale (think small independent hotels and
the like).

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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.

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sgjohnson
>It’s a zero-sum game, because there are always winners and losers in the
stock market.

Not really. Yes, there are winners and losers, but my win doesn’t equate your
loss.

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Traster
And it's also worth remembering that the stock market has increased in value
(inflation adjusted) for decades. So whilst yes, it's true there are winners
and losers, most of the time the winners outnumber the losers.

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bradwood
Stock is equity in a company. A stock market is where, by and large, publicly
listed stock is traded. So why then, all this talk of bonds and governments?
Most debt does _not_ trade on a stock market, but via other mechanisms. The
author doesn’t have a good definition of “stock” which is worrisome in the
extreme.

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QuantumGood
Serious question. How does an article like this get so many upvotes, followed
by lots of comments saying the content is not upvote-worthy?

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marsRoverDev
This falls far short of "Everything You Ever Wanted To Know About The Stock
Market But Were Too Afraid To Ask".

Does anyone have a source that actually begins to explain thi stuff? I want
something that goes into long/short, that begins to take a stab (in simple
terms) at how to analyse a company's finances to identify red flags, or
reasons why investing might be a good idea.

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countryqt30
To get started, I recommend the McKinsey starter's videos at
[https://www.youtube.com/channel/UCJetbEO3QGCosQHb_43jVNg/fea...](https://www.youtube.com/channel/UCJetbEO3QGCosQHb_43jVNg/featured?disable_polymer=1)

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FearNotDaniel
I think you mean, a personal channel by a former McKinsey consultant.

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bedobi
How can these wildly inaccurate posts about medicine, economics and finance
keep getting so many upvotes?

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dcaisen
For an even deeper dive, you can check out the stock market primer our team
published a couple weeks ago:
[https://primer.prooftrading.com](https://primer.prooftrading.com)

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segmondy
This article is garbage, many books have been written on the market. Please
search for the real classics and pick one up.

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rv-de
An awkwardly written summary of the Wikipedia page on "stock exchange".

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thesumofall
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.

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wangarific
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.

