We all know what markets are, or do we? What is a stock market? What is a futures market? What is an options market? Do we really know? Consider this…
A market brings together buyers and sellers and transactions between them get done there. A stock market is where buyers & sellers of stock come together to acquire or exit shares of stock. A commodity futures market is where buyers & sellers of commodities like wheat and oil and precious metals come together to acquire or sell tangibles like those.
Let us think about markets more simply, with a few familiar examples we all know…
Consider your local grocery store. That is a market. Shoppers are buyers and the grocer is the seller. A grocery store may have many buyers come into that market each day… but it has only one seller- the grocer. The stock and futures markets have many buyers (many more than any grocery store will see in a day) and MANY sellers. This is an important distinction.
For the most part, the grocer has a fixed asking price, which is the price shopper will see on or around each item for sale. Stocks & futures will have an asking price too, but it is not so fixed. In fact, every day, it is highly likely to move around- sometimes dramatically.
Much like there are MANY stocks for sale in the stock market, a grocer offers LOTS of products for sale. A shopper could be looking at a can of corn, a steak, a tomato, or a case of water. Let us use the can of corn as an example. The grocer wants 99¢ for that can of corn. In market lingo, that is the “ask” price for the corn- a commodity by the way.
Exactly like the stock market, each shopper needs to decide if they want to pay that “ask” (price) or reject that price. If shopper thinks it is too expensive, they do not buy it. Perhaps other shoppers feel the same and also refuse to pay that much for corn.
If so, soon the grocery store may have an abundance of cans of corn. They probably want to get rid of their (now) oversupply and increase demand. One way of doing that is lowering their “ask” price. In doing so, the lower price may lure more buyers to buy. If they lower the “ask” to say- 69¢/can, the grocer may sell more cans of corn. A more attractive price tends to move more buyers to buy.
A better analogy for an investing market may be a flea market or garage sale. Unlike the grocer where pricing is relatively rigid, these are dynamic markets where sellers have their “ask” prices for their stuff and buyers may try to do some bargaining for a lower price.
For example, let us say a seller in such a setting is asking $20 for a rug. Since this is more like an investing market, buyers may want a lower price than “ask” by saying “I’ll give you $10 for that rug.” In market terminology, this is called a “bid” price, and- in this case right now- there is a very wide gap between the seller’s “ask” and the buyer’s “bid.”
A gap of that size probably will not get either what they want, so some bargaining starts working towards a price where both are willing to execute a transaction. Maybe they go back & forth until they meet somewhere in the middle and settle on $15 for a rug. This “bid” may be accepted by the seller and the transaction is completed: the seller gets $15 and the buyer gets the rug for less than the original “ask” price.
In a one-to-one transaction like this, a problem exists. Is $15 really the right price for that rug? What if a seller had a thousand rugs to sell and there were 1000 rug buyers shopping for rugs right now? Would $15 be the “settled” price for all of them? Probably not. Instead, some buyers would pay more than $15 and others might get a rug for less than $15. But with MANY buyers & sellers constantly negotiating on prices with bids & asks, that market will soon determine a much better idea of the right price for that rug. This idea that it takes MANY buyers & sellers to make a good market is a crucial concept for this lesson.
Another example: is housing. The seller has a house for sale and “asks” a billion dollars for their home. Someone shopping for a home may come along and “bid” $10 for the same house. Which is the right price? Neither. With only one seller and one buyer, there is no dynamic market for the home. What is a realistic price for the home? Unknown. So how can we figure it out like the stock or commodities markets figure out the right price for their products?
One way is to add lots of buyers & sellers. What if we have- say- 20 people selling houses in that neighborhood and there are also 20 prospective buyers shopping for those homes? With 20 homes on the market, there is now going to be competition between buyers & sellers in this “market.” Buyers will absolutely bid higher than $10 for a home and sellers will absolutely sell homes for less than a billion dollars.
The more buyers and sellers we have in a market, the more accurately we will arrive at the true price of a commodity (a house in this case). We will get as close as possible to the real market value of those houses for sale when there are many buyers and many sellers.
The ultimate analogy of a market that you have probably seen or experienced is a live auction. They have been used for thousands of years to attract many buyers and sellers to one place to drive transactions.
In a typical auction, there are abundant buyers ready to bid on whatever sellers have to sell. Sellers may have a price in mind for their offering and bidders may have a peak price they are willing to pay for an offering but once the auction gets rolling, what might have been relatively solid ideas about the price of things tends to get set aside. A good quantity of bidders will bid something to the maximum price someone is willing to pay for it. And that becomes the market price… until the next auction for a comparable thing which then may shift that final price up or down by closing on a different market price… until the next auction, which may shift the market price yet again.
All of these example “markets” are minuscule when compared to the stock market. At any given moment during market hours, there are countless MILLIONS of buyers and sellers in action at the SAME time. With that kind of volume, it is called a liquid market: the buying & selling “auctions” are fluid, and bid & ask prices are generally very close to each other… sometimes differing by only pennies per share. How do they get so close? So many transactions continually being filled are constantly discovering the real market price for all stock shares and commodities right now.
An investor can go into that market and, with the press of a button, buy or sell some shares of a company. Another investor in another market- the futures market- could buy a commodity like gold or oil or corn just as quickly. The relative efficiency of this capability is amazing.
Now think back to our first example: the grocer & the buyer. That was a one-to-one transaction. Odds are high that few people would get into any kind of auction-like bidding for a can of 99¢ corn, nor would the grocer opt to put a single can up for auction. If we apply that one-to-one idea to buying a business like- say- a retail dry cleaner, a buyer might have to get a business loan and it might take up too many months to complete a transaction so that this single business can change hands.
If the very same business buyer wants to buy a business in the stock market, they could take ownership of some shares in one second. And if they decided they made a mistake in buying that stock, they could turn around and sell it in one second too. If they had some reason to do so, they could do that over and over again in the same hour: buy a company, sell a company, buy the same company, sell the same company, again… and again.
Back down at the one-to-one level, there is no way a business buyer could do that with that dry cleaner business. Both the buying and selling processes would likely be quite lengthy. For whatever reason, someone wanted to buy & sell & buy again & sell again that dry cleaner business could take many years to complete those transactions.
The stock market has over 8,000 different companies that anyone can buy or sell in seconds. Why is it so fluid… so liquid… so efficient in allowing ownership changes that quickly? It is a massive global market with plenty of buyers & sellers for every stock at just about any hour of every day.
The main idea in this lesson is that a market brings buyers & sellers together- ideally many of both- so that transactions can discover the right price for whatever is being sold. Good markets will efficiently facilitate transactions, so they do not take months or years but can be completed as quickly as possible.
Before we conclude this overview, let us cover one more fundamental concept:
In an ideal market, a buyer wants to buy low and sell high.
Where one can somewhat barter over price (like the flea market or garage sale), the buyer should be seeking a lower price than “ask” while the seller should be working to pull those “bids” up to higher prices.
In a market of over 8,000 opportunities being bartered every day, a shrewd buyer can utilize various kinds of analysis to seek out an opportunity that may be a bit underpriced and likely to rise in the future. Buyers can buy that “bargain” with an aim to later become a seller when it moves towards being overpriced. How does it go from underpriced to overpriced? It gets driven there by the daily transactional bidding of countless others interested in the same company or commodity.
When you have your investor (buyer) hat on, you want to buy your stock or commodities at a relative bargain price. Your focus is on the bid price, and you would like to beat that bid if at all possible.
When you become the seller, you want to sell at the most you can get. Now “ask” is more important to you and you would love to get more than ask if possible.
Buying low and selling high over time is the most fundamental path to becoming rich. Part of what we do at InvestingWinners is help our followers learn to do that well. Let us help you prosper from this day forward.
We all know what markets are, or do we? What is a stock market? What is a futures market? What is an options market? Do we really know? Consider this…
A market brings together buyers and sellers and transactions between them get done there. A stock market is where buyers & sellers of stock come together to acquire or exit shares of stock. A commodity futures market is where buyers & sellers of commodities like wheat and oil and precious metals come together to acquire or sell tangibles like those.
Let us think about markets more simply, with a few familiar examples we all know…
Consider your local grocery store. That is a market. Shoppers are buyers and the grocer is the seller. A grocery store may have many buyers come into that market each day… but it has only one seller- the grocer. The stock and futures markets have many buyers (many more than any grocery store will see in a day) and MANY sellers. This is an important distinction.
For the most part, the grocer has a fixed asking price, which is the price shopper will see on or around each item for sale. Stocks & futures will have an asking price too, but it is not so fixed. In fact, every day, it is highly likely to move around- sometimes dramatically.
Much like there are MANY stocks for sale in the stock market, a grocer offers LOTS of products for sale. A shopper could be looking at a can of corn, a steak, a tomato, or a case of water. Let us use the can of corn as an example. The grocer wants 99¢ for that can of corn. In market lingo, that is the “ask” price for the corn- a commodity by the way.
Exactly like the stock market, each shopper needs to decide if they want to pay that “ask” (price) or reject that price. If shopper thinks it is too expensive, they do not buy it. Perhaps other shoppers feel the same and also refuse to pay that much for corn.
If so, soon the grocery store may have an abundance of cans of corn. They probably want to get rid of their (now) oversupply and increase demand. One way of doing that is lowering their “ask” price. In doing so, the lower price may lure more buyers to buy. If they lower the “ask” to say- 69¢/can, the grocer may sell more cans of corn. A more attractive price tends to move more buyers to buy.
A better analogy for an investing market may be a flea market or garage sale. Unlike the grocer where pricing is relatively rigid, these are dynamic markets where sellers have their “ask” prices for their stuff and buyers may try to do some bargaining for a lower price.
For example, let us say a seller in such a setting is asking $20 for a rug. Since this is more like an investing market, buyers may want a lower price than “ask” by saying “I’ll give you $10 for that rug.” In market terminology, this is called a “bid” price, and- in this case right now- there is a very wide gap between the seller’s “ask” and the buyer’s “bid.”
A gap of that size probably will not get either what they want, so some bargaining starts working towards a price where both are willing to execute a transaction. Maybe they go back & forth until they meet somewhere in the middle and settle on $15 for a rug. This “bid” may be accepted by the seller and the transaction is completed: the seller gets $15 and the buyer gets the rug for less than the original “ask” price.
In a one-to-one transaction like this, a problem exists. Is $15 really the right price for that rug? What if a seller had a thousand rugs to sell and there were 1000 rug buyers shopping for rugs right now? Would $15 be the “settled” price for all of them? Probably not. Instead, some buyers would pay more than $15 and others might get a rug for less than $15. But with MANY buyers & sellers constantly negotiating on prices with bids & asks, that market will soon determine a much better idea of the right price for that rug. This idea that it takes MANY buyers & sellers to make a good market is a crucial concept for this lesson.
Another example: is housing. The seller has a house for sale and “asks” a billion dollars for their home. Someone shopping for a home may come along and “bid” $10 for the same house. Which is the right price? Neither. With only one seller and one buyer, there is no dynamic market for the home. What is a realistic price for the home? Unknown. So how can we figure it out like the stock or commodities markets figure out the right price for their products?
The more buyers and sellers we have in a market, the more accurately we will arrive at the true price of a commodity (a house in this case). We will get as close as possible to the real market value of those houses for sale when there are many buyers and many sellers.
The ultimate analogy of a market that you have probably seen or experienced is a live auction. They have been used for thousands of years to attract many buyers and sellers to one place to drive transactions.
In a typical auction, there are abundant buyers ready to bid on whatever sellers have to sell. Sellers may have a price in mind for their offering and bidders may have a peak price they are willing to pay for an offering but once the auction gets rolling, what might have been relatively solid ideas about the price of things tends to get set aside. A good quantity of bidders will bid something to the maximum price someone is willing to pay for it. And that becomes the market price… until the next auction for a comparable thing which then may shift that final price up or down by closing on a different market price… until the next auction, which may shift the market price yet again.
All of these example “markets” are minuscule when compared to the stock market. At any given moment during market hours, there are countless MILLIONS of buyers and sellers in action at the SAME time. With that kind of volume, it is called a liquid market: the buying & selling “auctions” are fluid, and bid & ask prices are generally very close to each other… sometimes differing by only pennies per share. How do they get so close? So many transactions continually being filled are constantly discovering the real market price for all stock shares and commodities right now.
An investor can go into that market and, with the press of a button, buy or sell some shares of a company. Another investor in another market- the futures market- could buy a commodity like gold or oil or corn just as quickly. The relative efficiency of this capability is amazing.
Now think back to our first example: the grocer & the buyer. That was a one-to-one transaction. Odds are high that few people would get into any kind of auction-like bidding for a can of 99¢ corn, nor would the grocer opt to put a single can up for auction. If we apply that one-to-one idea to buying a business like- say- a retail dry cleaner, a buyer might have to get a business loan and it might take up too many months to complete a transaction so that this single business can change hands.
If the very same business buyer wants to buy a business in the stock market, they could take ownership of some shares in one second. And if they decided they made a mistake in buying that stock, they could turn around and sell it in one second too. If they had some reason to do so, they could do that over and over again in the same hour: buy a company, sell a company, buy the same company, sell the same company, again… and again.
Back down at the one-to-one level, there is no way a business buyer could do that with that dry cleaner business. Both the buying and selling processes would likely be quite lengthy. For whatever reason, someone wanted to buy & sell & buy again & sell again that dry cleaner business could take many years to complete those transactions.
The stock market has over 8,000 different companies that anyone can buy or sell in seconds. Why is it so fluid… so liquid… so efficient in allowing ownership changes that quickly? It is a massive global market with plenty of buyers & sellers for every stock at just about any hour of every day.
The main idea in this lesson is that a market brings buyers & sellers together- ideally many of both- so that transactions can discover the right price for whatever is being sold. Good markets will efficiently facilitate transactions, so they do not take months or years but can be completed as quickly as possible.
Before we conclude this overview, let us cover one more fundamental concept:
In an ideal market, a buyer wants to buy low and sell high.
Where one can somewhat barter over price (like the flea market or garage sale), the buyer should be seeking a lower price than “ask” while the seller should be working to pull those “bids” up to higher prices.
In a market of over 8,000 opportunities being bartered every day, a shrewd buyer can utilize various kinds of analysis to seek out an opportunity that may be a bit underpriced and likely to rise in the future. Buyers can buy that “bargain” with an aim to later become a seller when it moves towards being overpriced. How does it go from underpriced to overpriced? It gets driven there by the daily transactional bidding of countless others interested in the same company or commodity.
When you have your investor (buyer) hat on, you want to buy your stock or commodities at a relative bargain price. Your focus is on the bid price, and you would like to beat that bid if at all possible.
When you become the seller, you want to sell at the most you can get. Now “ask” is more important to you and you would love to get more than ask if possible.
Buying low and selling high over time is the most fundamental path to becoming rich. Part of what we do at InvestingWinners is help our followers learn to do that well. Let us help you prosper from this day forward.
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