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Stock exchanges

  1. Nov 30, 2004 #1
    I never really understood the stock exchange. :cry: Can anyone explain it to me in detail :tongue:
     
  2. jcsd
  3. Nov 30, 2004 #2

    russ_watters

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    Companies raise money by literally selling the company: a share of stock is a piece of ownership of the company. The stock market is where people buy and sell pieces of a company based on how that company is performing (if its making a proft, the company's value goes up and its stock similarly becomes more valuable)
     
  4. Dec 1, 2004 #3
    How do i buy shares or sell them?
    What is IPO?
    Is making money in stock exchange a gamble?
     
  5. Dec 1, 2004 #4

    iansmith

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    Before, one would go to a stock broker or at bank but now transaction can be done online with virtual stock broker.


    www.ventureeconomics.com/vec/glossary.html

    Yes it is because you are dependent on the company performance and on the demand for the stock. However, one can buy stock options that can be sold and bought at a specified price within a time periods. There also other types of stock that bought that offer a certain security. There is also strategies to minimize the risks.

    Something most people forget, only gain or lose money when you sell your stock.
     
  6. Dec 1, 2004 #5
    It is a game of skill. Long-term, say if you wait at most 5 years, the price will reflect how much money the company earns and the potential for future earnings. You will receive part of those earnings, if any, in the form of cash each year (dividends). Short-term, the price will sometimes depend on mass psychology, sometimes be purely random.

    It is sometimes said that the market is efficient, meaning that it is not possible to make money since the price perfectly and instantly reflect all information. Thus a game of chance. That is wrong, and can be illustrated by a joke: "How many economists does it take to pick a 100 dollar bill laying on the street? None, the market has already done that. There is no free lunch".

    That said, the stock market is probably the hardest game on the planet. Many of the smartest people in the world spend all or part of their time in predicting stock prices. It probably easier to make money in any other way.

    The economic function of stock markets is partly the provide money for often risky new companies. To provide a risky but sometimes high return investment for those with savings. For the founders of the company to gain from their work by selling part of their ownership. Companies on the stock market must provide much public information to their shareholders, meaning that it is often more difficult for a bad management to destroy a listed company. Also, the price gives a good judgement on how well the company is doing, giving the management feedback on how well they are doing and when they should change course. A listing often give free advertisement for a company.

    In short, the stock market is a good mechanism for moving the limited resources that society has to those areas where they will be of most use. For example, for quickly moving resources from the production of horses to cars, if that is more efficient considering all factors known. The stock market and related markets like commodities are among the more important brains of the capitalistic system, so it is good that many of the smartest people are making the decisions.
     
  7. Dec 1, 2004 #6
    I've heard about the statement "If wall street sneezes the rest of the world gets pneunemonia". What does it mean?
     
  8. Dec 1, 2004 #7

    selfAdjoint

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    Wall street is a leading indicator of the US economy, meaning that if the stock market indices go down and stay down, the economy is likely to go into a slump around six months later. The correlation isn't perfect, and there are other leading indicators, but Wall Street is a closely watched indicator. And the US economy is so big, and so tied in to the rest of the world's economies, that if it goes down, they tend to go down too.
     
  9. Dec 1, 2004 #8

    russ_watters

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    I'm a little surprised to hear that coming from you. I has been well documented that a monkey or a dartboard can turn a profit in the stock market over the long term. While it is certainly true that daytrading (hardly worthy of the term "investing") is a game of skill, long term investing, while still a gamble, is a low risk/high yield gamble.

    The reason for this is that the stock market is a gamble with a positive return. While a casino takes 5-10 cents from every dollar in play all the time, the stock market gives an average of 12 cents per dollar per year (not inflation adjusted). That means that pretty much as long as you aren't stupid or impulsive (same diff), you will turn a profit from a long-term investment. The way to do that is through wide diversification (such as an S&P index fund), periodic (monthly), and long-term (>15 years) investments.
     
    Last edited: Dec 1, 2004
  10. Dec 2, 2004 #9
    Some experiments say that women with no experience score better than a bunch of professionals...

    Maybe kwowledge isn't relevant in the world of stock exchange... :cool:
     
  11. Dec 3, 2004 #10
    I have also heard stories of how a lot of people compete against a monkey who randomly picks stocks and always does well...

    Also does anyone know what the ramifcations of the extended power of the EU will have on the US economy or should I start a new thread for this discussion... The dollar is sucking right now... is that because of bush or because of other factors.
     
  12. Dec 3, 2004 #11
    Regarding the return on the stock market in average long-term, is much less. Which should be obvious when considering how big the GDP long-term growth numbers are.
    http://faculty.london.edu/edimson/risk.pdf
    http://www.efficientfrontier.com/ef/499/ms5867.pdf

    And unfortunately, most people will lose even this small return. Meaning that most peope will be much more stupid than the monkey regarding stocks (or index funds). Most will buy near the top due psychological reasons. Man is a social animal who likes to travel in flocks. And those buying at the top will wait a long, long time for break-even. For example, those who bought an index fund in Japan 1990 have only seen losses for 15 years. Even before inflation.

    It should be obvious that the stock market is not automatically and magically totally and instantly efficient. Man has not created something with omniscience.

    Daytrading is game of skill, even if almost all lose. But there are people making hundreds of trades every day and who are consistent winners.

    Another evidence comes from just looking at the big financial banks. They have department that only specialize in trading. And they are making billions each year. They are using the fastest computers and the smartest mathematicians and they are consistent winners.
     
    Last edited: Dec 3, 2004
  13. Dec 3, 2004 #12
    you should try practiceing with the stock exchange for my economics class we made fake accounts in i believe yahoo finance... there are mutliplse sites out there that do it... I double my earning in a week... a fake 10,000 dollar investment
     
  14. Dec 3, 2004 #13

    russ_watters

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    It really is true that in some games, a little knowledge can get in the way of common sense and cause you to over-think things.
    Are you talking about my 12% figure? My comments are specific to the US, and the graph in fig 1 of your link actual says about 14%. And since I'm an optomist and consider the US economy to be continually evolving, I think that's a good reason to expect large failures such as the great depression will not be repeated, making the future brighter than the past.
    That's true (depending on what you mean by "most people"), and my point was that the most successful non-professional investors are the ones who completely remove psychology from the game. Or, rather, pick a game where psychology is not an issue: such as a 401K or IRA. The point of the dartboard and monkey examples is the dartboard and monkey are not burdened by overthinking or psychology and thus as long as the groundrules are set up correctly, they can (and do) make money.
     
  15. Dec 3, 2004 #14
    You are looking at the return during the decade of the greatest bull market in world history.

    Reading the papers and you will see that the US have been exceptional in making a real return of about 4% to its investors. Much lower in other countries. This number is more consistent with GDP growth.

    I agree that index funds are better if you are not a professional. But, you must still time the market to some degree, for example by looking at the p/e number for the market as a whole.
     
    Last edited: Dec 3, 2004
  16. Dec 3, 2004 #15

    russ_watters

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    My bad, I was looking at the wrong bar - the bar for 1900-2001 is at about 6% (I thought 14% seemed high...). But I'm pretty sure that's inflation adjusted. The author says his numbers are about 1.5% lower than what most sources report: I have often heard that the inflation adjusted return is ~8%. In any case, the 12% I used was not inflation adjusted. We're just talking about two different things.
    That's true only if you buy once, such as in your previous example:
    That's not how an IRA or 401K works. What if you bought the same dollar (yen) quantity of stock every year (or every month) of that 25 years?

    edit: I thought I posted this before, but now can't find it. "The Only Investment Guide You'll Ever Need", page 125:
     
    Last edited: Dec 3, 2004
  17. Dec 3, 2004 #16

    Nereid

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    Plot the distribution of those who 'beat the index' ... does it look like a Gaussian? AFAIK, there's no statistical basis for any claims that a strategy, fund, or person can consistently beat the indices over more than one business cycle (crudely, 5-10 years). Oh, and index funds have much lower MERs!
     
  18. Dec 4, 2004 #17

    selfAdjoint

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    I hope this is not too conspiracy theory-ish.

    From some stock dealings I had back in the 60's and 70's I concluded that there is a small group of Wall Street insiders who run deliberate bubbles every year. They make their money by taking it away from suckers who are led to invest in the bubble. The evidence for this is that every year there is a hot group of penny stocks that soar for a while, but only one of them reaches a high peak ( though for no good reason), then in the Fall they drop.
     
  19. Dec 4, 2004 #18

    russ_watters

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    To make sure there is no misunderstanding here, I'm not saying you can beat an index (in fact, I'm saying you should use an index fund). I'm simply saying that you can turn a profit relatively easily.
    There is nothing conspiracy theory-ish about that: its actually happend on a number of occasions and in the 20s (I think) it was a pretty common thing. There are two variations:

    What you are describing sounds like a "pump and dump" - the movie "Boiler Room" depicted something like this. Basically, a company hypes a specific, worthless stock and through an influx of money from gullible investors, the stock rises dramatically in a short period of time. The company that started it has a bunch of money in it and pulls their money out, turning a tidy profit, and leaving their customers to lose everything when the price of the stock collapses. This is, naturally, illegal.

    The other vatiation is legal, but no longer works: when the market was much smaller, it was possible for a single large investor to put enough money into it to increase its value, ride his own bounce, then sell for a nice profit. IIRC, a billionare tried this in the 80s and it didn't work because the market is simply too big for one person to affect it.
     
  20. Dec 4, 2004 #19

    selfAdjoint

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    Right, and I think the illegal "pump and dump" still goes on, but spread over a handful of independent inside investors intead of a single company. Since these folks establish their parameters with a wink and a nod and "advertise" them by leaks to investor newletters, they are almost impossible to catch in the act.
     
  21. Dec 4, 2004 #20
    It is probably not possible to find that distribution due to tax evasion.

    There is an ongoing paradigm shift from efficient markets to behavioral finance:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=349660#PaperDownload
     
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