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How The Market Works
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Hii! I know that everyone here on this subreddit probably doesn't care but just looking for the few that will be helpful. I am a senior in highschool and our current project in my economics class is using the website howthemarketworks .com to trade fake stocks and compete with fellow classmates. The winner who makes the most money gets a 100% on a test grade, pizza & huge bragging rights lmao ( I am slightly competitive as you can tell) Does anyone have any advice on what stocks to invest in and trade right now to make the most money between now and may. Thanks in advance :)
Top Comment: Head over to Wall Street bet
Reddit - The heart of the internet
Main Post: Reddit - The heart of the internet
It's hard to beat the market. Ok, but what is "the market"?
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Common advice you get everywhere: "Don't try to beat the market, just invest in X". The irony is that X always seems to be something else.
In this sub, it's usually the S&P500. But this sub is mostly used by people from the US. If you visit a European investing sub and tell them you are "100% in SPY", they will tell you that's it's hard to beat the market and that's it's better to invest in the MSCI World.
Then you do that and next time people will tell you "it's hard to beat the market, you better also invest into the MSCI EM." Alright, so you throw some emerging markets into the mix.
Then you come back here and everybody points out that SPY has, in fact, consistently beat the MSCI World. Ok, you think, that's actually true. Maybe you should mix in 50% SPY as a compromise? Only to realize that the Nasdaq 100 in turn has beaten SPY consistently as well. And Apple outperformed the Nasdaq 100. So all in Apple? Because it's hard to beat the market?
Top Comment: Nasdaq is rarely used as the market. It's tech focused
IMPORTANT FOR NEW TRADERS: UNDERSTANDING HOW MARKET MAKERS WORK
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Given that there seems to be a large misconception of what market makers are, I felt it prudent to share some information. I often here the phrase "the market makers just want to take your money and keep the stock away from $X price." This is inherently incorrect.
Market making is the identification of buyers and sellers with the intention of allowing them to consummate transactions. It is all done algorithmically.
Exchanges offer rebates to market makers in exchange for those market makers providing liquidity in different markets – they will pay MMs to hold short or long positions that provide liquidity in the market
Example: A person wants to sell her stock for $51.00, but the current best offer (bid) is $49.00. If another market participant was desperate enough to purchase the stock, they would just move the bid to the ask. In this case, the liquidity provider is the participant who posted the $51.00 ask, meaning that they provided supply of that stock, which was sold.
If the algorithm decided that the fair price was $50.75 and the buyer was satisfied enough to purchase the asset at $50.75, the transaction would be consummated, and the seller would receive a rebate (in the form of a payment for their order flow)
Some of this fee would come from the buyer (in the form of commissions, hence why when you hit the bid or ask, you are charged a higher fee with most brokerages, but when you leave your order open at the bid or ask and it is taken up on, you pay a lower commissions since you helped to provide liquidity)
There is essentially an algorithmic hunt for rebates occurring.
Diagram depicting Market Maker activity in a transaction
In the options markets, for instance, MMs are now holding the majority of the positions that buyers and sellers are trying to either accumulate or offload.
These market makers are much more important because of their size and due to their large positions, which they are required to hedge to maintain delta neutrality.
Given the institutional mindset, which is to generate income passively by selling call options or buying puts on SPY, for instance, a situation is created whereby market makers who are hedging are compressing volatility as markets move higher (hence why the VIX declines steadily into market rallies).
Conversely, market makers cause exaggerated selloffs when the market declines, which is why markets fall so much faster than they tend to rise, because they rapidly attempt to hedge their positions that they are short on the way down.
Market makers basically create pressure points in the market through their activities and they exert the most pressure when rapid moves occur, further amplifying these moves.
Some of the largest market makers are: Virtu Financial, Citadel Securities, Two Sigma Securities, Susquehanna, Tower Research Capital, Jump Trading, DRW, Hudson River Trading, among others.
Hope you found this useful and Godspeed.
Top Comment: So I work for one of the biggest market makers on the street. > Given the institutional mindset, which is to generate income passively by selling call options or buying puts on SPY, for instance, a situation is created whereby market makers who are hedging are compressing volatility as markets move higher (hence why the VIX declines steadily into market rallies). This is wrong. The mindset of market makers is to make markets and earn a spread. They can take some risk on board and in the old days earned theta but there isn't much money in that any more. > Market makers basically create pressure points in the market through their activities and they exert the most pressure when rapid moves occur, further amplifying these moves. I have no idea what this means. The part about accelerating selloffs could be correct if they are short gamma but that is symmetrical so is not why markets crash faster than they rise.
Why is marketing important?
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I am doing a research paper on why marketing is important, and I am interested to know how others feel about marketing, I appreciate all answers. Once I am done I will post it on here, thank you
@eimantask
Edit: thank you all for your comments, a few of you made great points. I'm sorry if it wasn't clear, but it was meant to be vague. I was asking about the overall concept of marketing, why it is important. Yes, it is everything that a company communicates to consumers, trust is a big issue. But more on the basics, i.e. The creation and radiance of an idea. Marketing is important for the basic reason of idea communication. Then it starts branching out to various concepts many of you listed.
Thank you all for the input. Cheers!
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I can easily show you a dozen restaurants in my city that have a million times better food than McDonald's at roughly the same price. But none of them swims in money like Ronald McDonald does. That's why
ELI5: How does the stock market work? Who are the people who work in the stock market?
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How does the stock market work? Who are the people who work in the stock market?
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The stock market is a place where shares in companies are traded between different institutions and individuals. I'll break this down into stocks, the market itself, and the people who work on it. This is gonna be just a few select details because the system is INCREDIBLY intricate. I can elaborate in the comments.
Stocks:
A stock is an ownership share in a publicly traded company. When a company needs, say, $1 million to finance its business, it can either borrow money or issue equity. Equity means that investors give the company money, in exchange for ownership. In this example we'll say they give the $1 million for 50% ownership. In this case, they would be entitled to 50% of the future income from the company. The actual income itself isn't really what the investor is after, he really invests hoping that the value of his ownership stake goes up. Companies can do this privately, or sell their shares to the general public. "Stock" is this share in a public company. If I buy 1% of Apple's stock, I own 1% of Apple and am entitled to 1% of it's "dividend" payout (companies, especially growing companies, rarely pay out all of the year's income, instead most is reinvested and spent on the business).
Stock Market:
The stock market is where shares are traded. Once a company sells its shares to the public, the owners are totally free to trade these amongst themselves. Once this begins happening, stock price is simply supply and demand. Many things can affect stock prices, but I'll stick to the basics. If a company is expected to do well and make money in the future, its price goes up. People begin buying the stock. The more people want to buy a certain stock, the higher a price they are willing to pay. Think of it like a piece of designer clothing. Yea the quality might be a little higher, but it's really costing thousand of dollars simply because people are willing to pay that. Conversely, when something bad happens to a company, people begin to sell their shares. As more shares are being put into the market, the price goes back down because no one wants it. Think of it like a video game that no one really likes. Gamestop keeps dropping the price to try and get people to buy.
One way of seeing how this works is looking at large trades of small companies. This doesn't happen to big stocks like Apple, but for small companies one investor (almost always a company, not one dude) can own, let's say, 50% of a company. If he decides to sell all of that, the company's stock price will dramatically increase right away because all of a sudden twice as many shares are available.
The People:
To explain the people who make the stock market work, I first have to explain the type of business involved. Once again, this a very general look at it.
Funds/Institutional Investors: These are the people who are buying the stocks. People invest their money in these funds, usually with a long term focus. Funds then pick the stocks to invest that money into and give the returns to the original investor, minus a fee for managing.
Broker-Dealers: These are the sales and trading arms of large financial institutions, such as Goldman Sachs, JP Morgan, Credit Suisse, etc. Broker dealers basically act as middle men. What a retired dude does with something like ScottTrade, an institutional investor does with a broker dealer. When they want to buy or sell a certain stock, the institutional investor contacts the broker dealer and the broker dealer finds someone for them to trade with. They engage in "market making", which means they will buy from clients who want to sell and sell to clients who want to buy. They general try not to hold any stocks overnight. They make their money off "spreads" from these middle man transactions, not the movement of the stock price itself. A "spread" just means that when they buy a stock from a company, they will sell it at a slightly higher price. The spread is the difference between these two prices, and it is the money that the broker dealer makes.
Proprietary("Prop") Traders/Hedge Funds: Proprietary trading means trading stocks with the intent of making money off the actual price changes of the stock. Buy low, sell high. This is done by firms, including, at times, those large broker dealers. Prop trading by huge banks (that regular people have their money in) is actually frowned upon, because technically they are gambling with other peoples' money). Hedge Funds are similar, but face less regulation from the government and thus use MUCH more complex strategies. They take a ton of risk, but the returns that they generate can be EXTREMELY high. The guys managing successful ones make billions. For example, in a single trade during the 2008 crisis, John Paulson personally made about $4 billion. Anyway these guys are like more advanced funds, they invest to make money and do this using broker deals to find people to trade with.
The people themselves:
I'll start with the broker-dealer because it's what I'm most familiar with.
So there are salespeople and there are traders. Salespeople here are basically the same as salespeople anywhere else, but with knowledge of financial markets. They schmooze with clients so that when a guy from a certain hedge fund wants to buy a stock, he calls up such-and-such bank. Classic sales job, really. They really shine when the broker dealer is holding on to a certain stock and needs to sell (like I said before, they want to have no stocks at the end of the day). So they have to find someone to get the stocks to.
Traders execute the trades themselves. At broker-dealers, they basically fill client orders. They also keep track of movements in markets so that they know when the best time is to buy and sell, working hand-in-hand with the salespeople. Many of these roles are, unfortunately, being filled by computers.
Additionally, these firms have operations people to make sure that all the trades are properly accounted for in the computer system. Sometimes a company's records show that a certain trade happened, but "the street" (everyone else) has records that it did. These people make sure everything is recorded right so that the whole system works properly. There are also a bunch of IT people who basically run the infrastructure.
Funds and hedge funds have similar structures. They have "portfolio managers" who plan out the overall investment strategies and pick the stocks to invest in. The traders working for these firms execute the strategy for them in a way that maximizes profits. Prop traders, whether they are doing it at large banks, or small prop trading firms, are basically like professional day traders. Buy low, sell high (or borrow high, sell high, buy back low, return to lender low).
Stocks are only a small part of finance. There are bonds, which are basically a way that a company borrows money. Also there are options and other derivatives, commodities, etc. Also tying into the whole thing is "private side" stuff, like investment banking. These guys facilitate mergers and acquisitions between companies, help sell the initial share offerings by public companies, all that fun stuff. Hope this all makes sense, I'm kind of just spewing out thoughts sporadically.