Tuesday, May 27, 2008

Stock Markets - 2

If you do have substantial investment experience, you can breeze through the next content, so we'll proceed as if you haven't. One good source of personal investment advice is a solid book on the subject. A book will be most reflective on the underlying issues and thereby help that you don't get too caught up in the details of the subject or get too enthusiastic if you blindly luck into some early success investing. There are also some well designed Web sites that provide basic investment information and are a little easier to access. A third alternative is to try a simulation online so you can go through the motions of trading and get the informational feedback from that, but not experience the (possibly adverse) financial consequences from your decisions.

Since a couple of these alternatives require you to spend a few dollars (or to make some effort to go to the Library to get the book) please note that we are not promoting any one of these alternatives as the best way or even as a good way to self-educate. Instead, in each case you can take the listed alternative as representative of a genre. Then feel free to find different sources in a search engine or an online book store for other like alternatives that you deem better, more accessible, or more desirable in some other dimension. The real key is to get some of the basics about investing. If the path in getting there works for you, then it works.

Investment book by well known finance professor
A Random Walk Down Wall Street

Web Site
CNN and Money Magazine Investment Basics

Virtual Stock Exchange
Manage a Portfolio or Play an Investment Game

Now let's turn to the supply and demand perspective. Because the stock market is about the buying and selling of assets it shares certain properties with housing markets. After all, homes are also assets and as we've indicated most people who play in the housing market game do so as buyer (of the new home) and seller (of the old home). Likewise in the stock market, where assets are purchased and later sold. One significant difference between the two is that with housing we focus on the consumption value (the benefit from living in the home) and think of the asset value issue as secondary, while with stocks there is essentially no consumption value issue to consider; stocks are all about asset value. In other words, even if you like to drink Coke, you might very well buy Pepsi stock, thinking that stock will do well in the market. Your choices about which assets to buy and sell are driven by asset return considerations, not your consumption preferences.

This is not to say your experiences as consumer doesn't affect your views as investor. If you get good service from a company, you might value it. But the consumption experience and investor expectation are not directly correlated.

Here are two other areas where stock markets are different from housing markets. Stocks are a homogeneous product. One share of common stock in a company is a perfect substitute for another share of common stock in that same company. Stock markets are centralized, with the trade occurring on a "Stock Exchange." Because of these two key features, homogeneity and centralized trading, stock markets (and other financial markets) are sometimes considered the closest entities in actuality to the textbook ideal of a market. In essence, these markets are always in competitive equilibrium.

A stock may trade on multiple exchanges. There may be Market Makers who trade in the stock as well as computer systems called ECNs. Centralization is not perfect.

SEC on Trade Execution
SEC on Market Makers

One of the salient facts about stock market prices is that they change over time. Just to convince yourself of the truth of this fact, follow the link to the NASDAQ, choose call letters for a stock you know or do a symbol lookup to find the call letters or use msft (Microsoft). Then go to the pull down menu and get a Summary Quote. What type of pricing information does the summary quote return? How do those prices differ?


1 comment:

Prof said...

Why don't we have stock exchanges that are up and running 24x7?