How does the stock market work?

<p>I don't have any clue about this but I have to do an assignment relating to this. Generally is there any tips about how to gain profit? I guess it's not based on luck , right?</p>

<p>when should people buy shares? When should they sell it? Any explaination would be good. Thanks.</p>

<p>buy low, sell high.</p>

<p>Another thing: don't be too quick to sell your shares when they are up. Statistically, the stock market has never fallen over a twenty year period. Haste makes waste.</p>

<p>OK, first of all, there are different approaches to buying stocks. One is from a statistical point of view, one from a brand-name point of view, and one from a wholistic point of view. All three approaches combined would create the optimal trader. Usually, a trader has a few basic things to look for in a stock to see if it's a good one. These things I reccommend you look up on Wikipedia, as they have the best explanations. Some you will have to Google though, and some are concepts rather than statistics:</p>

<li>Price-Earnings Ratio (p/e ratio) - Lower is often better.</li>
<li>Stock charts have patterns. Look up "cup and handle chart"</li>
<li>volume is the number of shares traded in a day, and it can be important</li>

<p>Those were just a sampling of tips, because I'm getting kind of bored. But this is the site where I learned about stocks:</p>

<p><a href=""&gt;;/a&gt;&lt;/p>

<p>Stocks are the best thing to learn about; I have made $20,000 in 2 years by investing in stocks, using only my own income from a high school job at Zesto's.</p>

<p>wow cheesybread, you sure are lucky</p>

<p>i love the stock market. if my parents let me buy them, id have alot more money by now. i was forced into buying some CDs when the stock i wanted was at $25. now it's at $40 and ive lost money on my CDs because of inflation. Can't wait until i'm on my own.</p>

<p>right, price earnings is incredibly important. A stock could be trading at say $90000 a share ( Bershire Hathaway is somewhere aroudn that price) and be paying back say $7000, and say mcdonalds is trading at 258 a share ( I'm making this up) and paying $ 20.78, so these two sharesd would be in theory "equal" cost wise..... Diversify, diversify , diversify... There are certain industries that tend to be directly related with the business cycle, and others inversely related,. so you might want to consider the general economy before choosing industries in which to invest.....There's a study, I believe its form like the 80s, where this guys calculated that it was more or less equivalent to throw darts on a lsit of stocks and buy those to actually researching etc.. its a really interesting article, some people agree others disagree, if I find it again I'll post the link.</p>

<p>buy penny stocks if you have to do an assignment- you'll gain a lot more profit or loose a lot
but mostly gain a lot.</p>

<p>Md4me> Not quite no. </p>

<p>P/E is not everything. P/S is not everything. P/B is not everything. Ratios will never capture the essence of an entire business. I am guessing you want to "invest", by which I mean focus on longer periods of time. If you do then think of a stock like a business. The goal of every business man is to buy below the stocks value. The calculation of value is never exact but when you buy at a steep enough discount from a theoretical value of a particular stock you are essentially buying a dollars for <1 dollar. </p>

<p>Megaman> you are talking about the book a "Random walk down wall street" by Malkiel. Some points are good, however, it has been proven time and time again that profits can be made in the markets and that it is non random. Fama, for example, showed that small caps "value" stocks will outperform "growth" stocks. (Note the quotations as the definition can vary). I suggest you get a copy of the paper on Google Scholar/Jstor etc(written by fama and french in the early 90s...I think). Andrew Lo of MIT further showed that pure price patterns (aka technical analysis) can also generate non random returns. </p>

<p>As for diversification, I suggest you invest your money in a focused manner. Put your eggs in a few baskets and WATCH that basket. It has been shown that, statistically, when you have only 4 stocks you reduce 70% of the non market risk and that figure goes to 90+% when you hold 16 stocks. The more you diversify the less likely it is that you will actually be doing intensive research and keep up with your holdings. </p>

<p>The fact that you are a small piker can actually be an advantage as you can focus on areas where professions do not have access to due to legal, liquidity and size issues. </p>

<p>For the OP> Get yourself: A) Intelligent Investor B) a good book on reading financial statements. After that you will be able to progress your education further.</p>

<p>Another thing to note is that there is just not one type of investing/trading that works. There are many roads that various successful traders/investors have taken. A lot depends on an individual.</p>

<p>I know about buy low sell high, but I still can't find a logical example of how the stock market works.</p>

<p>Like why buy fundamentally sound companies, when isn't price just based on what others sell/buy for?</p>

<p>Once you figure out how the stock market "works" send me a PM. I will pay you good moola for it ;). </p>

<p>As I have noted there isn't any one way that profits can be made. Successful traders/investors come in all shapes and forms. Some trade >10K times a day. Others may make a move once a year. </p>

<p>BTW if someone could tell you how profits could be made, that edge would wear away as other market participants would eat into that edge rendering it useless. So no successful trader/investor will completely reveal what they do/ how they do it/ why they did something (until its after the fact and the objectives have already been fulfilled).</p>

<p>The stock market can be manipulated. there's no way it can't be!</p>

<p>What do you mean by manipulated? All markets are driven by supply and demand. The fundamental reasons markets are used is that goods should be worth what people are willing to pay for them. So yes in a sense it is manipulation as people do directly influence prices (it just doesn't move independently) but that is just how the fundamental system is set up. </p>

<p>Typically market manipulation is something like say: A fund pays a research company to publish a report that XXX is a poor stocks so there is selling pressure. The fund can then jump in and buy the shares at "artificially" lower prices.</p>

<p>I know that supply and demand are the basis of the whole stock market. I'm saying that I'd never invest in it knowing that someone has control over it. A supplier can raise the price of a product by simply decreasing the supply, and can just as easily reduce it by flooding the market.</p>

<p>While that may occur temporarily, it is unsustainable. There are numerous examples when a particular group tried to control the supply and guide prices. The best is that of Hunt brothers cornering of the silver market which left them in financial ruin. Markets correct themselves as participants realize a void or competitors realize a niche which can be exploited.</p>

<p>As for stock markets in particular, there are controls (such as regulation and breakup of monopolies) to prevent firms from commiting such actions.</p>

<p>thanks for all the explanation, guys. So which industry should I invest in? Is there any particular stock that you recommend? It's just an assignment for Econ, but if I end up liking it, I might decide to invest for real in the future.</p>

<p>Intel is near its lows and looks like it has a good future:)</p>