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Let's talk about the stock market....

Cuda1447

Cuda1447

Lifer
I'm a bit of a noob when it comes to the stock market. I understand the basics and have always found it fascinating. When I was a boy I wanted to grow up and trade stocks. Hell, the idea is still fascinating to me, but also very scary. I look at the stock market like this.... tell me if I'm on the right track.


The market is a lot like poker. For every person that makes money, somebody has to lose money. If you are good and can take advantage of the suckers you will make money. The problem is, unlike poker, some people have a huge advantage in the stock market (stacked deck, inside knowledge) so the odds of you being the sucker are a lot higher than in poker.


Thoughts? Discuss.
 
Cuda1447 said:
The market is a lot like poker. For every person that makes money, somebody has to lose money. If you are good and can take advantage of the suckers you will make money. The problem is, unlike poker, some people have a huge advantage in the stock market (stacked deck, inside knowledge) so the odds of you being the sucker are a lot higher than in poker.
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Sometimes. But in the bigger picture it's more like a balloon that inflates and deflates making everybody rich or poor together. Say you own a share in WizzyCo. You bought it at $10/share yesterday. There are 10 million shares of WizzyCo in existence. Today, somebody paid $12/share for a few shares so the price of WizzyCo is now $12/share even though only a few shares were traded. WizzyCo was worth $100 million yesterday and is worth $120 million today. $20 million bucks just sprung into existence. Tomorrow someone tries to unload their handful of WizzyCo shares and ends up selling for $8/share. So tomorrow WizzyCo is worth $80 million and $40 million in value just vanishes.
 
IronWing said:
Sometimes. But in the bigger picture it's more like a balloon that inflates and deflates making everybody rich or poor together. Say you own a share in WizzyCo. You bought it at $10/share yesterday. There are 10 million shares of WizzyCo in existence. Today, somebody paid $12/share for a few shares so the price of WizzyCo is now $12/share even though only a few shares were traded. WizzyCo was worth $100 million yesterday and is worth $120 million today. $20 million bucks just sprung into existence. Tomorrow someone tries to unload their handful of WizzyCo shares and ends up selling for $8/share. So tomorrow WizzyCo is worth $80 million and $40 million in value just vanishes.
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Interesting. So the key is to sell before your money eventually vanishes? It's very curious to me. Do you trade at all Ironwing? Much success? Day trader or long haul kind of guy?
 
Cuda1447 said:
Interesting. So the key is to sell before your money eventually vanishes? It's very curious to me. Do you trade at all Ironwing? Much success? Day trader or long haul kind of guy?
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My retirement is in target date life cycle funds. I don't know enough about the market to try trading on my own.
 
There are big differences between the market and poker.

In poker, you can't make money just by watching the best players. In poker, the bad players are almost certain to lose money.

The market might be a zero-sum game, but there are plenty of opportunities to make money even if you aren't the smartest guy in the room.

I don't see the stock market as pure gambling. There are trends, there are good and bad investments. Armed with knowledge, you don't have to be in a game where ONLY the best players make money and the worst players always lose. Now, there are ways to play the market so that it is almost pure gambling - day trading, options, chasing the hot stocks, etc. But if you look at it as an investment, long term, and read what smart people are doing (Smart Money, Kiplingers, Forbes, etc.) you can do very well.

Just to illustrate the point...

Putting your life savings in a single solar energy company is gambling. While solar may have a good future, there is no one company that is positioned to dominate it, and the industry isn't very mature. Some genius might make a breakthrough technology discovery tomorrow that makes his/her company number 1 overnight, and your company is left in the dust.

Taking your life savings and spreading it across a number of strong, well-established companies which would be very hard to dislodge in their industry (Pepsi, Johnson and Johnson, utility companies) is probably not gambling.

Most people screw up by not being patient and trying to make a fortune right now.
 
If the stock market was zero sum, how is the market cap for the entire Dow Jones xxxxx times bigger than it was in the early 1900s?
 
Stock market is not zero sum. Value of stocks is what someone is willing to pay for them. That can change for many reasons.
 
The thing to keep in mind about the stock market is stock prices are based on 2 different things.

1. Based on the actual company...how good a business it is and how people think it will do in the future.

2. Based on everything else...world events, people trying to ride a hot stock to make money, speculation, etc.

If it was solely based on 1, everything would be relatively easy. However, I tend to think that 2 has a large impact, so large in fact it can be used to make money without knowing anything about the actual companies and their profitability. It also explains how investing in "good" companies doesn't guarantee you will make money.
 
There is a stock market thread. Investopedia is a good place to get some more indepth answers.

I've been trading a lot recently with mixed success. It can be difficult, especially if you're just trying to make a quick buck.

Some pointers:

- On the investopedia website there is a stock market 'game' in which you are given an imaginary 100k and can 'trade' like you would if you actually did. It's a very good way to start off as you can see what works, what doesn't, and how the market works. If you just throw money at some company you've a very good chance of losing that..quickly.

- Don't get into the hype of penny stocks. They can move very quickly in either direction and can take many people for an uncomfortable ride. Penny stocks tend to be in companies that are 'crap', with either questionable practices/finances or they've gone broke. Course that doesn't hold true for all of them, but a lot of them are 'delisted' and on other markets. However if you learn how they operate then you can make some serious gains here because a relatively small movement in share price means a large change in your funds simply due to how many shares you will own. That's sort of the appeal. This guy knows his stuff about them: http://flippingpennystocks.com/

- Stocks tend to follow chart patterns, and knowing how to read a chart can help advise you on your timing. Various resources out there for that. However in the end chart plays are most useful for short term flips, long term simply look for a good entry price and hold out.

- Safest way? Find a well respected company (cisco, ford, etc) that is doing well financially and then look for a price that's 'acceptable'(unless it's really improving then not at 52w high preferably (some stocks you will be close, ie Ford) and then just hold it for awhile.
 
Poker odds is that the house have 60~65% chance of wining while you have 35~40% of wining.

Stock market is different because you can spread your money across the board or, invest in S&P 500 and have the odds of 8~12% return a year doubling your money roughly every 7.2 years. There are bad years but if you hold on it is likely to recover.

And, there are insane people that hedges that play options market, or worst place bets by shorting stocks, but IMHO these type of playing the market is no longer investing because it is pure gambling.
 
rudeguy said:
I prefer white over dark colored. Unless I am wearing dress slacks.
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this only works in one thread per week

iGas said:
Poker odds is that the house have 60~65% chance of wining while you have 35~40% of wining.

Stock market is different because you can spread your money across the board or, invest in S&P 500 and have the odds of 8~12% return a year doubling your money roughly every 7.2 years. There are bad years but if you hold on it is likely to recover.

And, there are insane people that hedges that play options market, or worst place bets by shorting stocks, but IMHO these type of playing the market is no longer investing because it is pure gambling.
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How does the house win in poker?
 
thepd7 said:
this only works in one thread per week



How does the house win in poker?
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My bad, maybe not as high as an advantage but there is a slight advantage to the house on blackjack, craps, slot machines, etc...
 
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Cuda1447 said:
The market is a lot like poker. For every person that makes money, somebody has to lose money.
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You forget one major component. Dividends.

In poker at your home, you may lose $10 one day and someone wins that $10. But, in a casino, the casino will take a cut of that $10. Meaning, that you lose $10, someone wins $9, and the casino takes $1. Zero sum if you count the casino, money losing overall if you don't count the casino. On the next day, if you win $9, someone loses $10, the house takes a $1 cut. Overall with poker, you won $10 once and lost $10 once but you are still out $1 to the casino.

The opposite occurs with stocks. The companies that pay dividends take money from their customers and hand to the game players (stock owners). With stocks, you may lose $10 on a stock, you may gain $10 on another stock, but you still walk away with $1 profit in dividends.
 
dullard said:
You forget one major component. Dividends.

In poker at your home, you may lose $10 one day and someone wins that $10. But, in a casino, the casino will take a cut of that $10. Meaning, that you lose $10, someone wins $9, and the casino takes $1. Zero sum if you count the casino, money losing overall if you don't count the casino. On the next day, if you win $9, someone loses $10, the house takes a $1 cut. Overall with poker, you won $10 once and lost $10 once but you are still out $1 to the casino.

The opposite occurs with stocks. The companies that pay dividends take money from their customers and hand to the game players (stock owners). With stocks, you may lose $10 on a stock, you may gain $10 on another stock, but you still walk away with $1 profit in dividends.
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Point taken and I agree. Overall, there might be SLIGHT winnings, if you are a winner and not a loser. So overall, the average is that everyone wins money. However, for the most part it is very close to a zero sum game. If I am a break even player, I might make just a little bit of money. But for everyone who is a slightly above average player, there is someone who is slightly below average. So, although the math is skewed just a bit in favor of stocks over the market, the fact that some people have an inherent advantage, whereas in poker, at the start of the game you are on equal footing, it means that the stock market is a riskier endeavor than poker.... if that makes sense. Perhaps I'm not explaining myself very well.



Another question I had about stocks is this. Let's use Verizon as an example. Now let's pretend news of the Iphone being released on Verizon is going to cause the stock to raise. At what point does the stock actually rise? I doubt it would be when the official announcement is made, as most people will know prior to an official announcement, so the stock would have risen prior to that. So is it at the time the information is leaked to the public and you have to be REALLY fast to jump on it in order to capitalize? Or, is it prior to the public even getting that information. Meaning that those with inside knowledge will capitalize on this prior to the information even being leaked to the public. If that is the case, it would mean that if you do not have inside knowledge and are privy to information the general public is not, than you do not realistically have a shot at getting a stock at one point in hopes that the stock raises based on a future development. Basically, only those with inside knowledge would be wise to trade those stocks, as they have a huge advantage over the average person. The average person would simply be guessing, as they have to act prior to ANYONE knowing the information, ala crystal ball shit.


Sorry if I don't make sense tonight, I've had a bit of a long day and might be rambling.
 
Cuda1447 said:
I'm a bit of a noob when it comes to the stock market.

The market is a lot like poker. For every person that makes money, somebody has to lose money.
Click to expand...

Stock market has less in common with poker than it shares in similarites. It's a reflection of an expanding or growing economy. (Think of the expanding universe. You just don't want to get sucked into a black hole.) For the past 24 years the S&P 500 has had only 5 negative annual returns. 19 to 5 - now that looks pretty good.

So do you have a 401k at work and how much is the matching? Have you bothered to invest in it?
 
alrocky said:
Stock market has less in common with poker than it shares in similarites. It's a reflection of an expanding or growing economy. (Think of the expanding universe. You just don't want to get sucked into a black hole.) For the past 24 years the S&P 500 has had only 5 negative annual returns. 19 to 5 - now that looks pretty good.

So do you have a 401k at work and how much is the matching? Have you bothered to invest in it?
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I do... matching 3% which is what I contribute. I'm not talking about long-term safe stocks. I'm most interested in the daily/monthly/yearly trading of stocks. The people who buy stocks for a couple of months and then sell. That is the aspect of the market that particularly intrigues me.
 
Cuda1447 said:
Another question I had about stocks is this. Let's use Verizon as an example. Now let's pretend news of the Iphone being released on Verizon is going to cause the stock to raise. At what point does the stock actually rise? I doubt it would be when the official announcement is made, as most people will know prior to an official announcement, so the stock would have risen prior to that. So is it at the time the information is leaked to the public and you have to be REALLY fast to jump on it in order to capitalize? Or, is it prior to the public even getting that information. Meaning that those with inside knowledge will capitalize on this prior to the information even being leaked to the public. If that is the case, it would mean that if you do not have inside knowledge and are privy to information the general public is not, than you do not realistically have a shot at getting a stock at one point in hopes that the stock raises based on a future development. Basically, only those with inside knowledge would be wise to trade those stocks, as they have a huge advantage over the average person. The average person would simply be guessing, as they have to act prior to ANYONE knowing the information, ala crystal ball shit.
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Look at it another way... let's say that the news was such a well-kept secret that nobody knew ahead of time. Then the news is announced publicly. How long do you think it will take for the stock to reflect that news? About 5 minutes. You won't be able to act quickly enough to benefit from it assuming you aren't sitting at the computer reading business news every waking moment. By the time the average person hears the news and decides to make a move, the stock already reflects the impact of the news.

A frequently quoted saying is "buy on the rumor, sell on the news" meaning it's too late to buy the stock once the news is public.

Cuda1447 said:
I'm most interested in the daily/monthly/yearly trading of stocks. The people who buy stocks for a couple of months and then sell. That is the aspect of the market that particularly intrigues me.
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If you are talking daily/monthly trading, then you're gambling. Smarter people than you and I have lost money thinking they can do this successfully. Yes, some people do well, but IMHO it's a very small percentage, and unless they have inside information to act upon, they are luckier than they think.

However, if you recognize that short-term buying/selling is essentially gambling, and you're OK with that, remember to figure in your transaction costs and taxes on any profitable trades.
 
iGas said:
And, there are insane people that hedges that play options market, or worst place bets by shorting stocks, but IMHO these type of playing the market is no longer investing because it is pure gambling.
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options can be used to lock in current gains w/o the use of limit orders. for example, if you bought stock at $10 and it is now at $12 you can buy call options for $13 (the right to buy at $13).

Now say the stock drops to $9. So if the stock drops and you lose the $2 profit and even are another $1 in the hole, but you make money off the right to buy the stock at $13, or $4 worth of profit (minus the cost of the call option and the $1 loss off initial).
 
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