Markets have been operating probably since the dawn of time, since man is a trading animal! We are all familiar with a street market where, on special Market Days, several traders set up their stalls (the ‘Sellers’), and the public (the ‘Buyers’) come and buy their products. Trade takes place during fixed times and stops when the market closes. Mostly, the prices paid are constant during the day.
Financial markets are similar, in that buyers and sellers come together in a fixed place (the ”Exchange”) and at fixed opening and closing times, but this time, prices are determined purely by the interaction of the Buyers and the Sellers – and constantly fluctuate. That makes for opportunity for profit!
The financial markets trade in those instruments such as equities (shares), indices of equities (derivatives), bonds/gilts, currency pairs, and we also consider commodities, such as soybeans, gold, crude oil, etc. They are based on the futures markets for these instruments (derivatives), or the cash market.
But what, or who determines the prices in the market? And what makes the price go up or down? The conventional ‘wisdom’ is that it is the forces of supply and demand. But the real mechanism is much more basic: When a price goes up, that new trade has the buyer and seller agree that the new higher price is correct, not the old, lower, price (otherwise, they would not trade!). This new trade at a higher price then imparts market information that influences the other traders, who make decisions based on this knowledge.
As prices move up, observers then find it easy to justify the upmove with reference to ‘bullish’ news, thus attracting more buyers. (If prices had moved down, this “bullish” news would not have been given prominence in the media, you can be sure!).
So, markets move up with increasing confidence, and down with decreasing confidence. Understanding this, we can use technical analysis, which attempts to measure confidence levels, to make predictions of the likely market direction. That is what we are about as traders.
Trading refers to the practice of buying and selling financial instruments; a trader is looking to capitalize on the movement of a financial instrument that, in the judgment of the trader, is in a tension state ready to accelerate in price in either direction. When traded well these movements provide potential for substantial profits.
What is Trading?
Put simply, trading is buying and selling ‘things’ to try and make a profit. The ‘things’ may be baseball cards, works of art, or used cars. This course won’t help you buy and sell those. In the financial world, the ‘things’ are stocks and shares, and other types of things that I’ll explain later, and that’s what this course is about.
Stocks and shares represent ownership in a company. The words are often used interchangeably, and usually shares will refer to just one company, and stocks referred to ownership in several companies. For instance, you might have a shareholding in IBM, and that could be part of your stock portfolio.
Not all companies have public ownership, but this is something that often happens as private companies grow in size. By a process called the Initial Public Offering (IPO), a company will offer shares for people to buy, and in this way will get money to help expansion, operation, or whatever. Once the shares have been sold into the market with the IPO, then they are traded between individual and corporate owners, and the original company has little to do with this.
What does the shareholder get out of it? Sometimes, companies will send some of their profits to the shareholders, and these are called dividends. These payouts are usually not guaranteed, and some companies don’t issue dividends at all. So the shareholder may get some income, and is usually hoping that the shares will increase in value over time, and he will make a profit that way.
But the shareholder has literally bought part of the company, and has a voting voice in the running of the company, usually at the Annual General Meeting. Unless you’re wealthy like Warren Buffett, you probably won’t hold enough shares to be heard, but many shareholders together can influence the course of the business. Shareholders want the business to succeed so that the company can afford larger dividends and the shares increase in value.
With that said, shares go up and down in value every day and the price really depends on what everybody ‘en masse’ thinks it should be. Trading is not precise mathematics, but more group psychology, and emotions play a strong part in how you trade, and how others perceive the market.
Before you even start please take note of the Top 10 Bad Reasons for Becoming a Trader
10. My buddy is a trader, and he’s making a boatload of money.
9. I’m good at gambling and video games.
8. Great working hours and lifestyle.
7. I’ve developed a trading system and know it will work for you (but I haven’t tested it).
6. If (Person X) can do it, so can I.
5. I’m young, and it’s worth a shot.
4. I’m ballsy and can take big risks to make a lot of money.
3. I’m not ballsy and won’t take big risks to make a lot of money.
2. I read books/took seminars by (Writer X, who has never successfully traded) and realized I can do this.
1. I have a passion for trading and the markets (but I’ve never traded or studied the markets).
>> Next Page – History of the Financial Markets
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