Comprehending the Market
Investing, as well as trading, within the financial markets have long since been one of the most profitable avenues of pursuit for any citizen or individual. Ever since the Dutch created the very first original stock market in Amsterdam within the 17th century, in order to facilitate the buying and selling of VOC (the Dutch East India Company) shares, stock markets have had an air of prestige and mystery to them for the casual onlooker.
This same air of prestige and mystery, however, has caused the comprehension of the markets to elude many who pursue it. Bombarded by terms full of jargon such as volatility and target stock price, many novice investors find themselves overwhelmed by the intricacies of the market. This article will seek to address such a problem by delving into four aspects of information that should be required reading for any aspiring market participant. So, without further ado, let us delve into the four pillars of info for every investor!
The Market Moves in Cycles
The first pillar of market knowledge that we’ll introduce is the fact that the market moves in cycles. The market, as well as the larger economy as a whole, moves through periods of prosperity (known as market booms and/or bull runs) and periods of poverty (known as bear markets and/or recessions). Although this may seem like common sense to the reader, even the most experienced investors tend to forget this fact, particularly in the heat of the moment.
During the modern-day fast pace of the market, with numbers and valuations flying past your head, it can be difficult to remember that everything taking place is only a smaller aspect of the grander picture. Remembering that the market moves in cycles and will always have both up days and down days will enable one to maintain their mental and emotional composure when the going gets tough; a skill even the likes of Buffet could admire.
Stocks vs. Options
Secondly, we’ll delve into the distinction between trading and/or investing using stocks, versus doing the same with options, a newly popular form of investing quickly being adopted by retail and institutional market participants alike. As you know, a stock refers to all of the shares by which a corporations ownership is divided up. The more stock a person owns, the greater their ownership stake within the company; which enables them to reap an appropriate share of the profits.
Options, on the other hand, refer to contracts written up by individual investors pertaining to the right to either buy or sell 100 shares of certain stock. An important note is that you have the right to do so, but nowhere is it required for you to do so; hence, the designation of an “option.” Options are a form of derivative, and they provide much greater leverage than regular stock trading.
To balance this out, however, options are also significantly more risky than regular stock investing.
Market makers are the third bit of info we’ll be delving into. If you’ve ever participated in the market, you’ve dealt with a market maker. Market makers are individuals (or AI) within firms whose job it is to take the opposite side of market trades. A market isn’t a market without buyers and sellers, and market makers serve the purpose of facilitating liquid transactions across an economy, “greasing the gears” so to say.
An important distinction to note is that market makers do NOT rig or sabotage the market; half the time they have no idea what trade they’re even executing.
Always Do Your Research
With such a surge in novice, beginner-level investors, a common critique of the market is that many people seem to think merely looking at a stock and pressing buy is investing. As Buffet would tell you, this is wrong. Each and every investor should do extensive research into whatever asset they plan on pouring their money into.
Research can be conducted through fundamental means (i.e., analyzing company performance and records) or technical means (i.e., analyzing company stock performance and graphs). Both methods have their pros and cons which we’ll save for another article, but the important thing to remember is that a blind investor is a dead investor.