Please enable JavaScript.
Coggle requires JavaScript to display documents.
How stock market works - Coggle Diagram
How stock market works
want to get super rich?
dream
trying to get rich quick = expensive mistakes
GOAL = become comfortably well-off slowly
no free lunch; big returns prospect = big risk
prices stay fair because big guys compete; competitors + allies
small investors buy/sell at fair prices
is investing in your blood?
ordinary investors not on equal footing with big investors
how not to invest
don't try to beat the market
most professional money managers aren’t able to match the market
why = competition
demand and supply; prices high = sellers push down; prices low = buyers pull up
stock prices are usually fair
difficult to pick winners
Efficient Market Hypothesis = it’s almost impossible to pick winners consistently
research shows stock returns close to random
people want methods to predict
Humans hardwired to look for Patterns
uncertainty, randomness = uneasy
SUMMARY = we don't understand all forces moving the market
beating the market is just luck
searching for patterns
fooled by randomness; we instinctively try to find patterns in stock market
do patterns like "price increases tend to be reversed" really exist?
fair vs correct
start with assumption that price is fair - not overvalued or undervalued
most likely wrong, even if it is fair
how? because stocks are risky; don't know value tomorrow
like a coin flip; wrong in a single flip; fair in the long run
some days price is high, some days low; never exactly right
active traders are gambling; use a different strategy = take advantage of what you can do
getting into the market
temper your expectations; don't expect miracles
unlike a casino
there is risk and not just chance but expectation of profit
closest thing to "free lunch" = diversification
saving and investing like planting a tree, dieting, exercising
earlier you start, the better
how much you invest
the rate of return on your investments