22 ms·

What to know about the stock market (2007)

394 points by HerrMonnezza 5y ago

Synaesthesia 5y ago
You should probably get to know some critical aspects of markets too, this article just praises them. That is pretty much the norm, but I think it's a valuable educational endeavour to look at critiques of markets.
- hericium 5y ago
  Fully agree, especially during current instability. I think that everyone got used to constant "it's about to crash" news but the volatility and uncertainty are visible in recent months. I don't remember when inflation numbers releases were that impactful. The good coming out of this is the visibility of how strongly dependant cryptocoins are.
  - iso1631 5y ago
    The "Stock Market" is down since July, it might not have crashed but it's not going up Ukraine kicking off is not going to help in a sane world, but it's not a sane world so I half expect all time highs while Odessa burns
    - lotsofpulp 5y ago
      One aspect of buying securities and currency is the stability. People like stability, they will pay extra for secure cash flows, consistent courts, and rule of law that is predictable. In which case, because of its practical distance from Russia I would be optimistic about the US’s relative position, even if nominal equity values decline, they will maintain their relative value assuming the US does remains relatively more stable than other countries.
- bedobi 5y ago
  but... it does explain some of the most ubiquitous and fundamental problems of markets, like spreads and illiquidity? granted you could go on forever about an infite list of problems, eg that today so much trading happens in dark pools, so much stocks are owned by passive index etf managers who don't take an active role in ownership etc etc but for a rough summary I think this article explained some of the basics quite well
- darawk 5y ago
  Do you have any in mind?
  - agumonkey 5y ago
    "market makers" ?
    - bidirectional 5y ago
      Why are they a bad thing?
      - mosermint 5y ago
        Many market makers profit off speed and information advantages while providing liquidity. There are alternative market structures like frequent batch auctions that would allow better trading, lower spreads and negate the HFT speed arms race. This paper is a good overview: https://www.aeaweb.org/articles?id=10.1257/aer.104.5.418 https://www.aeaweb.org/articles?id=10.1257/aer.104.5.418
        jallen_dot_dev 5y ago
        And the reason their orders execute in front of others' is because they offer the best price. If they didn't exist I would have to pay a little bit more to buy, or sell for a little bit less. Is the full paper available without a login? Alternative matching schemes to price-time priority suffer their own drawbacks. Either there's no guarantee your whole order will fill (pro rata) or trade at all, and there can still be a speed arms race (there's an incentive to get your order in at the last possible moment before the batch to benefit from maximum information).
        darawk 5y ago
        The alternative schemes he's referring to are batch auctions, which don't eliminate price-time priority per se. What they do is bucket time priority into discrete chunks, which eliminate a certain class of high frequency strategy that probably isn't particularly economically productive. The problem with batch auctions relative to continuous time trading is that that discreteness forces market makers to charge larger spreads. That's the primary trade-off. Volume would likely be dramatically reduced while achieving comparably efficient asset allocation, but at slightly higher average transaction costs. Those higher average transaction costs however would likely go along with better tail behavior of spreads in unusual market conditions, and maybe better human interpretability under unusual conditions as well. What it comes down to is a question of how much those non-monetary benefits are worth to your economy. The longer you force market makers to hold inventory, the more they have to charge for that risk, all else equal. However, when market volatility spikes, they're also going to be less able to play certain types of high frequency games that erode liquidity when it's most needed. It's kind of a robustness/efficiency trade-off, like many things.
tobyhinloopen 5y ago
wcoenen 5y ago
One interesting thing about "highest bid" and "lowest ask" prices is that they can sometimes move up and down for days without a transaction ever happening. This can be observed in certain illiquid markets, e.g. for a specific bond of a company. In those cases, the "last trade price" is meaningless and it's very important to instead look at the bids and asks in the order book.
- gokhan 5y ago
  Why? Clearly, no one is actually willing to trade at those prices. Sometimes, one illogical price in illiquid markets drive the orderbook to illogical extremes. Without a transaction, all are meaningless.
  - benmanns 5y ago
    Bids and asks are making bold predictions about the current value of an asset. If they are wrong then anyone can enter the market and make a profit. Bid/ask of 99.90/100.10 means that the true value of the asset is between 99.90 and 100.10, because if it was really worth $100.20 someone would come in and buy up all the offers through $100.19 (give or take a bit for risk management, fees, and minimum profit targets). Usually what happens though in these markets is that the bid/ask is $95/$105 and true value is something like $101 but no buyer wants to pay a $4 spread and no seller wants to pay a $6 spread, so no trades happen. The last price could be $90 from back when the asset was $90/$100 true value around $95 and someone really needed to get out and was willing to pay (or didn’t know).
    - deleted 5y ago
      [deleted]
    - nly 5y ago
      Yeah kind of. Except market makers can pull liquidity in a microsecond and have higher privileges on many exchanges that retail investors investing through brokers do not. The best measure if pricing in my view is "what average price would I get or slippage would I see if I sold X shares right now?"
black_13 5y ago
ushakov 5y ago
the only thing you should know about the Stock Market: it favors those with more capital, if you don’t have much to begin with, don’t expect making life-changing amounts
- rlayton2 5y ago
  I think like lots of things... If you expect to do better than other people, be prepared to know more or do more then them. Many people dedicate their lives to learning the stock market and what to do. It's unlikely someone can beat them with doing the bare minimum research. Not saying there isn't shady stuff going on too. There definitely is, but even if there wasn't it is a skill based game.
  - DoingIsLearning 5y ago
    > Many people dedicate their lives to learning the stock market and what to do. It's unlikely someone can beat them with doing the bare minimum research. This hints at some sort of deserved meritocracy that just doesn't exist. Funding is king nowadays when a large fraction of trades happen via HFT. Implying that all you need is knowledge in order to reach wealth is misleading at best.
    - bidirectional 5y ago
      HFT is irrelevant, those firms basically compete with themselves and there's really not all that much money in it anyway. They're just providing liquidity and can basically be ignored 99% of the time.
      - nly 5y ago
        You realise there are proprietary trading firms with algorithms making billions of $ every year just trading stocks at high frequency, right? If anything they actively avoid trading against themselves and seek out opportunities in markets where retail investment is still at high participation.
sdevonoes 5y ago
Am I the only one in HN who is not into the stock market? I live in Western Europe and I would say 75% of my acquaintances don't do stock market. People I have known in the past (old people) didn't do stock market either. They all seem to have lived a normal life (decent jobs, decent house, decent family). Nothing extravagant but they got enough money to be "happy" in life.
- pjc50 5y ago
  Do any of them have private pensions? In the UK almost everyone will have been moved over to a "defined contribution" pension whose value is determined by the stock market, usually in the form of a "stakeholder pension". I don't "do" the stock market but I do have such a pension. And every few months sweep spare cash out of my current account into an index fund. Effectively I pay people to worry about this stuff on my behalf. People who retired more than about 10 years ago are far more likely to have "defined benefit" pensions whose value is independent of the stock market.
  - bidirectional 5y ago
    Even with DB schemes their funding often relies on exposure to equities.
    - pjc50 5y ago
      Yes, although the recipient is not supposed to be exposed to that - see the UCU strike starting today.
      - iso1631 5y ago
        LOL, I searched for "UCU strike", the first result was "UCU strike calendar" They have so many strikes they need to organise them to make sure they don't overlap each other
      - lotsofpulp 5y ago
        Everyone is exposed to it if they trade in the major currencies. The government will reduce the purchasing power of the currency to ensure the nominal returns to meet the defined benefit obligations are met. This, in turn, will boost the price of equities such as land and stocks, and eventually trickle down as inflation for food and fuel. You will get your defined benefit pension, but how much you can buy with it is variable. And it is going to be less than you think. That is the only way the equation balances with lower economic growth (especially due to lower population growth) and increased competition for resources from the other 7B people in the world.
pjc50 5y ago
Since this is mostly about one mechanical aspect of markets - what is a "bid/ask" spread - it applies beyond the stockmarket to crypto markets. Except those tend to have fewer rules about the order book. If you're trading indirectly, which is not unusual with a brokerage, you should be aware of what is meant by "best execution", and I offer this article with an explanation in FX: https://medium.com/bull-market/oranges-and-lemons-the-fx-scandal-in-perspective-cd3456089ce4 https://medium.com/bull-market/oranges-and-lemons-the-fx-sca...
MrYellowP 5y ago
I have a book written by André Kostolany, which taught me one thing and I believe I've forgotten the rest, because only this one fundamentally matters: Don't hunt for rising stocks, but chase the falling stocks. Everything that goes down either eventually goes up again, or dies. While this sounds like it's not helpful, all that's required is figuring out if a company is likely going to die. Even without any manual research, time is ultimately telling. The longer a company at the bottom doesn't die, the more likely it's going to rebound eventually. https://en.wikipedia.org/wiki/Andr%C3%A9_Kostolany https://en.wikipedia.org/wiki/Andr%C3%A9_Kostolany PS: Don't gamble your life away.
- pjc50 5y ago
  > He was able to make a profit during the decline in market prices which began at the end of 1929, having been bearish at the time. Well, yes, that might have informed his lessons from trading. There's another saying in the opposite direction, "never try to catch a falling knife". https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1545.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1545.pdf But it's not an unreasonable approach. Declines are often driven by panic. If you can determine that it's an irrational panic and the fundamentals of the business remain strong, then you can invest while it's undervalued. It's certainly better than buying just after something has gone _up_.
  - fsckboy 5y ago
    i find "never try to catch a falling knife" a weak metaphor because, never try to catch a knife on the way up either.
  - deleted 5y ago
    [deleted]
- WA 5y ago
  Wirecard entered the chat… I assume you have good intentions, but your post is severely lacking. One crucial thing with this strategy is time. WHEN is the time to buy a falling stock? While it is falling? Or when it is rasing again? Are we talking intraday or months? On a long enough time frame, every company will go extinct and every stock will go to zero. And your post is in direct contradiction of two other common stock insights: - Don’t catch a falling knife - The market is efficient. If a stock price goes down, there is probably a reason for it.
erwincoumans 5y ago
Just curious: Suppose there is some difference between buying price range and selling price range. The dealer (middle man) could become temporary in-between buyer or seller and take some of the profit due to this price difference. For example this could happen at a stockbroker or at a crypto exchange. Is this behavior regulated, and if so, how?
- kqr 5y ago
  I'm not sure what you're saying, but the spread between buying price and selling price is exactly how the temporary middle man gets paid for the risk they take in matching up buyers and sellers. The size of the spread depends on how large the perception of that risk is.
  - erwincoumans 5y ago
    Example to clarify: Buyer tells the trader to buy for (up to) 140. Seller wants to sell for (at least) 120. Trader gives 120 to seller, gets 140 from buyer, gets to keep 20 for himself.
    - kqr 5y ago
      Yes, and that's exactly how the middle man is compensated for the risk they take by buying something from someone they don't want, hoping to resell it shortly after.
      - erwincoumans 5y ago
        If this happens on an exchange (such as Coinbase), there is no risk, since the trader/middle man knows that there is a buyer for 140 and a seller for 120, so he can 'front run', buy at 120, sell at 140, keep 20.
    - gpderetta 5y ago
      If the seller is already in the market for an ask at 120, and there is a buyer ready to buy at 140, no trader can come in an pocket the difference in a regulated market. If there is no buyer yet and a trader suspect there might be in the future, it could try to buy at 120 and hope to sell in the future at 140. Of course the the sale might not materialize and they will need to take the risk.
lordnacho 5y ago
Well, that is how a basic orderbook works. But US markets have some special Reg-NMS rules that glue together things across exchanges. Being from Europe I'm not so familiar with it, but I understand it causes some interesting games to be played. If you want to actually understand how the market works, there's a fair bit more reading to do.
- nly 5y ago
  Not to mention the trend is more and more liquidity going dark.
- Rimpinths 5y ago
  Great point, and you understand the American stock market better than most Americans. This article was true about 20 years ago, but the author is completely wrong when he says this: "A single market to trade. All stocks for Microsoft (MSFT), are traded on the NASDAQ exchange. All stocks for Ford (F) are on the NYSE." MSFT and F both traded on 16 difference stock exchanges, not to mention countless "dark pools", each with their own book of bids and offers. But there's a national best bid-offer (NBBO) that all exchanges must respect, so it can behave like a single market. That's what Reg-NMS is about. The benefits of having several exchanges competing each other, while trying to retain the benefits of single market. This is also where HFT enters the picture with latency arbitrage and other trading strategies when prices on those markets get out of sync. 20 years ago, you could say that MSFT only trades on NASDAQ, but that hasn't been true since Reg NMS came into effect in 2005. Each stock has a primary listing market that controls things like halts and opening/closing auctions, but the stock can be traded on any exchange, each with its own dynamics.
dthul 5y ago
Does anybody know what happens when the bid is not equal to but higher than the ask? What is the price that will be used? Or will this not lead to a transaction at all?
- pjc50 5y ago
  I believe this results in paying the bid.
- djoldman 5y ago
  This depends on the matching algorithm. Generally if a bid is introduced that is higher than the ask, the volume at the ask is matched, then the volume leftover at each ask level is matched in order of price (then time).
- trosi 5y ago
  I don't know the answer, but I think it would make sense to consider which offer came in first: First case: you ask for 100 and then I bid 105 --> transaction clears at 100, the ask price Second case: I bid 105 and then you ask for 100 --> transaction clears at 105, the bid price This is because I implicitly think about bid offers as "I want to buy this for at most X dollars" and ask offers as "I want to sell this for at least X dollars". I might be completely wrong though.
  - gpderetta 5y ago
    Yes, usually transactions are executed at the resting order prices (i.e. whatever is already being advertised in the market, and a transaction can involve multiple orders at different prices).
- is0tope 5y ago
  As others have mentioned this depends on how matching works on the exchange. The case where the bid is higher or equal to the ask is known as a "crossed book". I most cases, this should never happen and if it does it would be as a result of a bug in the matching algorithm. If you place a buy/sell order with a price that is in excess of the best ask/bid respectively then that order will be matched against the opposite side. Under normal conditions what you suggested should be impossible. If you want to know more about how order books work, I wrote an article specifically about how this works mechanically: https://www.machow.ski/posts/2021-07-18-introduction-to-limit-order-books/ https://www.machow.ski/posts/2021-07-18-introduction-to-limi...
ptero 5y ago
The article focuses on order book basics of matching buyers and sellers, which is a pretty small part of "understanding the stock market" for anyone who wants to invest. I would also look at long-term history, business cycle (in the stock market terms), inflation and rates, liquidity crises as a background for investing. Those are much more valuable for an investor than order book details. My 2c.
mypastself 5y ago
Can anyone recommend a quality book with similar content? Mind you, not about investing strategies, but just basic facts about financial markets (including stocks and bonds). I’m fine with textbooks, provided they’re relatively easy reads, and under 500 pages.
- habosa 5y ago
  Despite being a “comic book” this is a pretty great choice: https://economixcomix.com/ https://economixcomix.com/
- ra7 5y ago
  I'm also interested in this. I've been looking to understand the mechanics of financial markets and I don't know where to start. In particular, I'm really curious about ETFs/mutual funds and what exactly happens "behind the scenes" when I buy a share i.e. what a share of a fund represents, how it translates to individual companies' shares, NAV, creation/redemption etc. I've heard these terms before, but I haven't been able to build a full picture.
cehrlich 5y ago
This is a great article that explains markets (not just the stock market really) in an easy to understand way. The one thing I believe people should know about the stock market is: There are people with more capital, time, and knowledge than you who will consistently beat you. Picking individual investments is mostly a sucker's game. Buying tech stocks and/or crypto in the last couple of years has been a consistent exception to this, but I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market. But sooner or later they will find themselves in a similar situation as those who thought investing in Japanese Tech companies was a surefire way to beat the market 20-25 years ago. So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life. To everyone who is trying to get rich quick now: Do your thing I guess, but be aware that you're gambling.
- mgh2 5y ago
  Why is this the top comment? It is just an opinion without much analysis. Yes, there is gambling but there is also investing, knowing the difference is key.
- dgb23 5y ago
  Isn't there some qualitative difference between financially focused decision making and domain focused decision making when it comes to investing vs. gambling (as you say)? An expert in some particular field sees different opportunities and make strong educated guesses vs a trader who will react on financial metrics.
  - cehrlich 5y ago
    To a certain extent yes, but don't fall into the trap of overestimating your own domain knowledge and underestimating that of others.
  - Retr0id 5y ago
    Traders can hire domain-specific technical consultants.
nameisname 5y ago
I've seen a lot of pompous threads and misinformation masquerading as facts threads but this one takes the cake for both on HN for me. I've never seen so many people high on themselves for investing in Tesla and Apple. I feel sorry for the people who read these comments or have to talk to these people about the market. Insufferable.
ceasesurthinko 5y ago
The only thing that I need to know about the Stock Market is that you should buy SPY, change your brokerage account password, and never touch it until retirement age.
Accacin 5y ago
That was a really great article for someone who didn't know much about trading. Very easy to follow and I felt like I've actually learnt something. Thanks for submitting this (and writing it, author!).
da39a3ee 5y ago
> Here’s why stock markets rock: Is he writing for pre-teens?
Foivos 5y ago
One thing is not clear. If person A has 10 items and asks for $10 per item and person B wants only 7 items for $10 per item, what happens? Person A just sells the 7 items and then waits for somebody else to pick the remaining ones? And vice versa what happens if someone wants to buy more stocks than what is offered?
- rcar1046 5y ago
  Generally...he'll have to lower the price on the remaining 3 shares to sell them it looks like as there was only demand for 7 items @ $10. Or he can simply wait until someone values them at $10. Conversely, if someone is willing to buy more than is available, people will probably make more available, just at a higher price.
- herodotus 5y ago
  When you place a buy or sell order, you can specify "all or nothing" if that is what you want.
- vishnugupta 5y ago
  I suggest reading up Market Maker [1]. In most scenario (assuming good demand for the stock you are buying and a functional market etc.,) a market maker, looking at their order book, buys 7 items from A. They sit on it until they are able to dispose off them to a buyer. In effect, you, as a buyer is buying a stock from market maker. Most of the equity market is not P2P but mediated by market maker. They take the liquidity risk (i.e., holding a bad stock if demand plummets) and are rewarded for that by making money off of every transaction through bid-ask spread. Of course I'm greatly simplifying as an equity order goes through a bunch of intermediaries but Market Maker play a central role here. [1] https://www.investopedia.com/terms/m/marketmaker.asp https://www.investopedia.com/terms/m/marketmaker.asp
- kbuck 5y ago
  The orders are partially filled (either on the buy or sell side). What this means is that the shares eligible to transact do so immediately, and the remaining shares sit on the order book and wait for someone to be willing to trade at that price. There is a specific option that you can set (usually called "all or none") that will prohibit partially filling an order and only allow it to execute in entirety.
globular-toast 5y ago
Ah, I never fully understood how the market maker worked. I intuitively understood that buying/selling at market price gets you an instant trade at a possibly slightly worse price but didn't realise the market maker made money from that. One thing the article doesn't mention is why people buy and sell stocks. The stock market used to be for companies to raise funds before they turned a profit. Usually for businesses like railways which need huge amounts of capital before they can even begin to operate. Nowadays it's usually companies that are already profitable. Speculation is also a much bigger concern for people than it probably should be. It used to be that just owning a share in a company was good because a company is (hopefully) productive and pays you a dividend. Now people only seem to think about "beating the market" which is a shame, I think.
- nly 5y ago
  Stock markets allow for price discovery. The market gives a verdict on what it thinks stock in a given company is worth, and it's there in public for all to see. They also allow liquidity. A public company can't stop you from selling your stake, or buying more. This is something you'd definitely value if you've ever been screwed out of equity at a startup.
mizzao 5y ago
This article explains what the stock market pretends to be. This book explains what the stock market actually is: https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599 https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393... It's much less friendly than it seems and only "efficient" for a select few.
- starkd 5y ago
  I don't think that's the spirit in which the article was introduced. It's an educational piece. Of course, it's about the ideal scenario.
- khold_stare 5y ago
  I greatly enjoy Michael Lewis and his books, but Flash boys was extremely inaccurate, full of factual errors. I've worked in the finance industry, in HFT at one of the firms mentioned in the book. I joined around the time Flash Boys came out, and it was required reading in the firm. Here are some points: - Michael Lewis really only got one side of the story - that of Brad Katsuyama, who had a vested interest in casting HFT players in a bad light to promote his own business - building the new exchange IEX. - Brad also blamed HFTs for systems at RBC failing to make massive trades like they used to. There was nothing nefarious here - RBC had just fallen behind the time in technology, like trying to send a Fax in a world where everyone already uses Email. If Brad, or RBC, or RBC software engineers picked up the phone and called any of the exchanges, they would probably gladly update them on the industry and save them all the work of re-discovering it themselves. - The claims about front-running are completely false. Front running would mean that a market maker somehow knows someone's orders at two different exchanges and somehow is able to "get in front of the line" or even know that those orders belong to the same person. This would mean the exchanges leak information or allow certain users "ahead of the queue". None of this is true. What Michael Lewis called front-running, was HFT firms reducing their risk on other exchanges when they would get traded against on one exchange. They did this without any knowledge that Brad Katsuyama was on the other end, or that he was just late trying to make the same trade at another exchange at a later time. There are no guarantees that you can make the same trade at different exchanges - the same rules apply to everybody. - Unsurprisingly, IEX as an exchange is no different from others, in that they need market makers (a.k.a. HFTs) to provide liquidity on their exchange. I wrote the code for the FIX gateways to connect our firm to IEX, and it was all business as usual.
u2077 5y ago
Better explained has some great articles that are definitely worth checking out. RSS feed: http://feeds.feedburner.com/Betterexplained http://feeds.feedburner.com/Betterexplained
khold_stare 5y ago
Really great article! Very well explained. One small inaccuracy is the claim that there is only one place for each stock. That has not been true for many years. In the US that was changed by https://en.wikipedia.org/wiki/Regulation_NMS https://en.wikipedia.org/wiki/Regulation_NMS . NASDAQ is the primary listing exchange for MSFT, which means they will hold the opening and closing auctions, but it can be traded on any equities exchange, NYSE, IEX, BATS, EDGE-A, EDGE-X, you name it. RegNMS also has rules that if there is a better price at another exchange, the order must be routed there. This establishes the "NBBO" - National Best Bid and Offer, so in a way there is always one best bid and one best ask, but it's an aggregate over all the exchanges.
codeulike 5y ago
My theory is that finance is all about making things too hard to understand, so that fraud, monopolizing/size advantages and market manipulation are easier to get away with. Fifty years ago that was possible on the stock market because it wasn't open to the general public. During the 80s/90s it was opened up to consumers and since then (adjusted for inflation) it hasn't really gone anywhere. Profits have now moved elsewhere, to where the complexity and the hiding places are (hft, crypto, derivatives)
tim333 5y ago
This is a nice article but a bit beginnerish and gets facts wrong partly because the author seems a bit vague on the difference between a maker and taker in a transaction. The maker is the party that sits there waiting for bids and offers to come in and that taker is the party that doesn't wait and says buy this now or sell this now. The bid is the lower price that a maker offers to buy stock for and the ask is the higher price that they offer to sell it for. In the first example > What you can buy it for? (Your best bid) > What you can sell it for? (What you’d ask for it) They have it the wrong was around I think in that the amount you can buy an iphone for as a taker / customer is generally higher than what you can sell it for so what you can buy it for is the (dealers) ask price and what you can sell it for is their bid. If you are a dealer / maker with a stack of iphones sitting there then the higher price you offer to sell them for is what you ask and the bid is what you'll offer for people selling you their phones. There are some other simplifications too like "All prices are completely transparent." In an ideal world but in reality there are off market transactions, wash trading, faking and so on.
dragontamer 5y ago
For a fun graphic from the 1950s: https://news.ycombinator.com/item?id=29309175 https://news.ycombinator.com/item?id=29309175 "What makes us Tick" was a high-quality cartoon that explained the theory of the stock market, and the benefits of captitalism in general. Of course, its a Cold War era propaganda cartoon, but its still a really clear and simple explanation. The "Ticker Tape" may sound quaint, but "Market Makers" are really just those round-lot dealers that are discussed in the cartoon. The overall explanation remains valid for today's market, just with more automation / computers involved today rather than humans on a telephone.
cryptojournal 5y ago
I've missed this story!

394 points by HerrMonnezza 5y ago

You should probably get to know some critical aspects of markets too, this article just praises them. That is pretty much the norm, but I think it's a valuable educational endeavour to look at critiques of markets.

hericium 5y ago
Fully agree, especially during current instability. I think that everyone got used to constant "it's about to crash" news but the volatility and uncertainty are visible in recent months. I don't remember when inflation numbers releases were that impactful. The good coming out of this is the visibility of how strongly dependant cryptocoins are.
- iso1631 5y ago
  The "Stock Market" is down since July, it might not have crashed but it's not going up Ukraine kicking off is not going to help in a sane world, but it's not a sane world so I half expect all time highs while Odessa burns
  - lotsofpulp 5y ago
    One aspect of buying securities and currency is the stability. People like stability, they will pay extra for secure cash flows, consistent courts, and rule of law that is predictable. In which case, because of its practical distance from Russia I would be optimistic about the US’s relative position, even if nominal equity values decline, they will maintain their relative value assuming the US does remains relatively more stable than other countries.
bedobi 5y ago
but... it does explain some of the most ubiquitous and fundamental problems of markets, like spreads and illiquidity? granted you could go on forever about an infite list of problems, eg that today so much trading happens in dark pools, so much stocks are owned by passive index etf managers who don't take an active role in ownership etc etc but for a rough summary I think this article explained some of the basics quite well
darawk 5y ago
Do you have any in mind?
- agumonkey 5y ago
  "market makers" ?
  - bidirectional 5y ago
    Why are they a bad thing?
    - mosermint 5y ago
      Many market makers profit off speed and information advantages while providing liquidity. There are alternative market structures like frequent batch auctions that would allow better trading, lower spreads and negate the HFT speed arms race. This paper is a good overview: https://www.aeaweb.org/articles?id=10.1257/aer.104.5.418 https://www.aeaweb.org/articles?id=10.1257/aer.104.5.418
      - jallen_dot_dev 5y ago
        And the reason their orders execute in front of others' is because they offer the best price. If they didn't exist I would have to pay a little bit more to buy, or sell for a little bit less. Is the full paper available without a login? Alternative matching schemes to price-time priority suffer their own drawbacks. Either there's no guarantee your whole order will fill (pro rata) or trade at all, and there can still be a speed arms race (there's an incentive to get your order in at the last possible moment before the batch to benefit from maximum information).
        darawk 5y ago
        The alternative schemes he's referring to are batch auctions, which don't eliminate price-time priority per se. What they do is bucket time priority into discrete chunks, which eliminate a certain class of high frequency strategy that probably isn't particularly economically productive. The problem with batch auctions relative to continuous time trading is that that discreteness forces market makers to charge larger spreads. That's the primary trade-off. Volume would likely be dramatically reduced while achieving comparably efficient asset allocation, but at slightly higher average transaction costs. Those higher average transaction costs however would likely go along with better tail behavior of spreads in unusual market conditions, and maybe better human interpretability under unusual conditions as well. What it comes down to is a question of how much those non-monetary benefits are worth to your economy. The longer you force market makers to hold inventory, the more they have to charge for that risk, all else equal. However, when market volatility spikes, they're also going to be less able to play certain types of high frequency games that erode liquidity when it's most needed. It's kind of a robustness/efficiency trade-off, like many things.

tobyhinloopen 5y ago

wcoenen 5y ago

One interesting thing about "highest bid" and "lowest ask" prices is that they can sometimes move up and down for days without a transaction ever happening. This can be observed in certain illiquid markets, e.g. for a specific bond of a company. In those cases, the "last trade price" is meaningless and it's very important to instead look at the bids and asks in the order book.

gokhan 5y ago
Why? Clearly, no one is actually willing to trade at those prices. Sometimes, one illogical price in illiquid markets drive the orderbook to illogical extremes. Without a transaction, all are meaningless.
- benmanns 5y ago
  Bids and asks are making bold predictions about the current value of an asset. If they are wrong then anyone can enter the market and make a profit. Bid/ask of 99.90/100.10 means that the true value of the asset is between 99.90 and 100.10, because if it was really worth $100.20 someone would come in and buy up all the offers through $100.19 (give or take a bit for risk management, fees, and minimum profit targets). Usually what happens though in these markets is that the bid/ask is $95/$105 and true value is something like $101 but no buyer wants to pay a $4 spread and no seller wants to pay a $6 spread, so no trades happen. The last price could be $90 from back when the asset was $90/$100 true value around $95 and someone really needed to get out and was willing to pay (or didn’t know).
  - deleted 5y ago
    [deleted]
  - nly 5y ago
    Yeah kind of. Except market makers can pull liquidity in a microsecond and have higher privileges on many exchanges that retail investors investing through brokers do not. The best measure if pricing in my view is "what average price would I get or slippage would I see if I sold X shares right now?"

black_13 5y ago

ushakov 5y ago

the only thing you should know about the Stock Market: it favors those with more capital, if you don’t have much to begin with, don’t expect making life-changing amounts

rlayton2 5y ago
I think like lots of things... If you expect to do better than other people, be prepared to know more or do more then them. Many people dedicate their lives to learning the stock market and what to do. It's unlikely someone can beat them with doing the bare minimum research. Not saying there isn't shady stuff going on too. There definitely is, but even if there wasn't it is a skill based game.
- DoingIsLearning 5y ago
  > Many people dedicate their lives to learning the stock market and what to do. It's unlikely someone can beat them with doing the bare minimum research. This hints at some sort of deserved meritocracy that just doesn't exist. Funding is king nowadays when a large fraction of trades happen via HFT. Implying that all you need is knowledge in order to reach wealth is misleading at best.
  - bidirectional 5y ago
    HFT is irrelevant, those firms basically compete with themselves and there's really not all that much money in it anyway. They're just providing liquidity and can basically be ignored 99% of the time.
    - nly 5y ago
      You realise there are proprietary trading firms with algorithms making billions of $ every year just trading stocks at high frequency, right? If anything they actively avoid trading against themselves and seek out opportunities in markets where retail investment is still at high participation.

sdevonoes 5y ago

Am I the only one in HN who is not into the stock market? I live in Western Europe and I would say 75% of my acquaintances don't do stock market. People I have known in the past (old people) didn't do stock market either. They all seem to have lived a normal life (decent jobs, decent house, decent family). Nothing extravagant but they got enough money to be "happy" in life.

pjc50 5y ago
Do any of them have private pensions? In the UK almost everyone will have been moved over to a "defined contribution" pension whose value is determined by the stock market, usually in the form of a "stakeholder pension". I don't "do" the stock market but I do have such a pension. And every few months sweep spare cash out of my current account into an index fund. Effectively I pay people to worry about this stuff on my behalf. People who retired more than about 10 years ago are far more likely to have "defined benefit" pensions whose value is independent of the stock market.
- bidirectional 5y ago
  Even with DB schemes their funding often relies on exposure to equities.
  - pjc50 5y ago
    Yes, although the recipient is not supposed to be exposed to that - see the UCU strike starting today.
    - iso1631 5y ago
      LOL, I searched for "UCU strike", the first result was "UCU strike calendar" They have so many strikes they need to organise them to make sure they don't overlap each other
    - lotsofpulp 5y ago
      Everyone is exposed to it if they trade in the major currencies. The government will reduce the purchasing power of the currency to ensure the nominal returns to meet the defined benefit obligations are met. This, in turn, will boost the price of equities such as land and stocks, and eventually trickle down as inflation for food and fuel. You will get your defined benefit pension, but how much you can buy with it is variable. And it is going to be less than you think. That is the only way the equation balances with lower economic growth (especially due to lower population growth) and increased competition for resources from the other 7B people in the world.

pjc50 5y ago

Since this is mostly about one mechanical aspect of markets - what is a "bid/ask" spread - it applies beyond the stockmarket to crypto markets. Except those tend to have fewer rules about the order book. If you're trading indirectly, which is not unusual with a brokerage, you should be aware of what is meant by "best execution", and I offer this article with an explanation in FX: https://medium.com/bull-market/oranges-and-lemons-the-fx-scandal-in-perspective-cd3456089ce4 https://medium.com/bull-market/oranges-and-lemons-the-fx-sca...

MrYellowP 5y ago

I have a book written by André Kostolany, which taught me one thing and I believe I've forgotten the rest, because only this one fundamentally matters: Don't hunt for rising stocks, but chase the falling stocks. Everything that goes down either eventually goes up again, or dies. While this sounds like it's not helpful, all that's required is figuring out if a company is likely going to die. Even without any manual research, time is ultimately telling. The longer a company at the bottom doesn't die, the more likely it's going to rebound eventually. https://en.wikipedia.org/wiki/Andr%C3%A9_Kostolany https://en.wikipedia.org/wiki/Andr%C3%A9_Kostolany PS: Don't gamble your life away.

pjc50 5y ago
> He was able to make a profit during the decline in market prices which began at the end of 1929, having been bearish at the time. Well, yes, that might have informed his lessons from trading. There's another saying in the opposite direction, "never try to catch a falling knife". https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1545.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1545.pdf But it's not an unreasonable approach. Declines are often driven by panic. If you can determine that it's an irrational panic and the fundamentals of the business remain strong, then you can invest while it's undervalued. It's certainly better than buying just after something has gone _up_.
- fsckboy 5y ago
  i find "never try to catch a falling knife" a weak metaphor because, never try to catch a knife on the way up either.
- deleted 5y ago
  [deleted]
WA 5y ago
Wirecard entered the chat… I assume you have good intentions, but your post is severely lacking. One crucial thing with this strategy is time. WHEN is the time to buy a falling stock? While it is falling? Or when it is rasing again? Are we talking intraday or months? On a long enough time frame, every company will go extinct and every stock will go to zero. And your post is in direct contradiction of two other common stock insights: - Don’t catch a falling knife - The market is efficient. If a stock price goes down, there is probably a reason for it.

erwincoumans 5y ago

Just curious: Suppose there is some difference between buying price range and selling price range. The dealer (middle man) could become temporary in-between buyer or seller and take some of the profit due to this price difference. For example this could happen at a stockbroker or at a crypto exchange. Is this behavior regulated, and if so, how?

kqr 5y ago
I'm not sure what you're saying, but the spread between buying price and selling price is exactly how the temporary middle man gets paid for the risk they take in matching up buyers and sellers. The size of the spread depends on how large the perception of that risk is.
- erwincoumans 5y ago
  Example to clarify: Buyer tells the trader to buy for (up to) 140. Seller wants to sell for (at least) 120. Trader gives 120 to seller, gets 140 from buyer, gets to keep 20 for himself.
  - kqr 5y ago
    Yes, and that's exactly how the middle man is compensated for the risk they take by buying something from someone they don't want, hoping to resell it shortly after.
    - erwincoumans 5y ago
      If this happens on an exchange (such as Coinbase), there is no risk, since the trader/middle man knows that there is a buyer for 140 and a seller for 120, so he can 'front run', buy at 120, sell at 140, keep 20.
  - gpderetta 5y ago
    If the seller is already in the market for an ask at 120, and there is a buyer ready to buy at 140, no trader can come in an pocket the difference in a regulated market. If there is no buyer yet and a trader suspect there might be in the future, it could try to buy at 120 and hope to sell in the future at 140. Of course the the sale might not materialize and they will need to take the risk.

lordnacho 5y ago

Well, that is how a basic orderbook works. But US markets have some special Reg-NMS rules that glue together things across exchanges. Being from Europe I'm not so familiar with it, but I understand it causes some interesting games to be played. If you want to actually understand how the market works, there's a fair bit more reading to do.

nly 5y ago
Not to mention the trend is more and more liquidity going dark.
Rimpinths 5y ago
Great point, and you understand the American stock market better than most Americans. This article was true about 20 years ago, but the author is completely wrong when he says this: "A single market to trade. All stocks for Microsoft (MSFT), are traded on the NASDAQ exchange. All stocks for Ford (F) are on the NYSE." MSFT and F both traded on 16 difference stock exchanges, not to mention countless "dark pools", each with their own book of bids and offers. But there's a national best bid-offer (NBBO) that all exchanges must respect, so it can behave like a single market. That's what Reg-NMS is about. The benefits of having several exchanges competing each other, while trying to retain the benefits of single market. This is also where HFT enters the picture with latency arbitrage and other trading strategies when prices on those markets get out of sync. 20 years ago, you could say that MSFT only trades on NASDAQ, but that hasn't been true since Reg NMS came into effect in 2005. Each stock has a primary listing market that controls things like halts and opening/closing auctions, but the stock can be traded on any exchange, each with its own dynamics.

dthul 5y ago

Does anybody know what happens when the bid is not equal to but higher than the ask? What is the price that will be used? Or will this not lead to a transaction at all?

pjc50 5y ago
I believe this results in paying the bid.
djoldman 5y ago
This depends on the matching algorithm. Generally if a bid is introduced that is higher than the ask, the volume at the ask is matched, then the volume leftover at each ask level is matched in order of price (then time).
trosi 5y ago
I don't know the answer, but I think it would make sense to consider which offer came in first: First case: you ask for 100 and then I bid 105 --> transaction clears at 100, the ask price Second case: I bid 105 and then you ask for 100 --> transaction clears at 105, the bid price This is because I implicitly think about bid offers as "I want to buy this for at most X dollars" and ask offers as "I want to sell this for at least X dollars". I might be completely wrong though.
- gpderetta 5y ago
  Yes, usually transactions are executed at the resting order prices (i.e. whatever is already being advertised in the market, and a transaction can involve multiple orders at different prices).
is0tope 5y ago
As others have mentioned this depends on how matching works on the exchange. The case where the bid is higher or equal to the ask is known as a "crossed book". I most cases, this should never happen and if it does it would be as a result of a bug in the matching algorithm. If you place a buy/sell order with a price that is in excess of the best ask/bid respectively then that order will be matched against the opposite side. Under normal conditions what you suggested should be impossible. If you want to know more about how order books work, I wrote an article specifically about how this works mechanically: https://www.machow.ski/posts/2021-07-18-introduction-to-limit-order-books/ https://www.machow.ski/posts/2021-07-18-introduction-to-limi...

ptero 5y ago

The article focuses on order book basics of matching buyers and sellers, which is a pretty small part of "understanding the stock market" for anyone who wants to invest. I would also look at long-term history, business cycle (in the stock market terms), inflation and rates, liquidity crises as a background for investing. Those are much more valuable for an investor than order book details. My 2c.

mypastself 5y ago

Can anyone recommend a quality book with similar content? Mind you, not about investing strategies, but just basic facts about financial markets (including stocks and bonds). I’m fine with textbooks, provided they’re relatively easy reads, and under 500 pages.

habosa 5y ago
Despite being a “comic book” this is a pretty great choice: https://economixcomix.com/ https://economixcomix.com/
ra7 5y ago
I'm also interested in this. I've been looking to understand the mechanics of financial markets and I don't know where to start. In particular, I'm really curious about ETFs/mutual funds and what exactly happens "behind the scenes" when I buy a share i.e. what a share of a fund represents, how it translates to individual companies' shares, NAV, creation/redemption etc. I've heard these terms before, but I haven't been able to build a full picture.

cehrlich 5y ago

This is a great article that explains markets (not just the stock market really) in an easy to understand way. The one thing I believe people should know about the stock market is: There are people with more capital, time, and knowledge than you who will consistently beat you. Picking individual investments is mostly a sucker's game. Buying tech stocks and/or crypto in the last couple of years has been a consistent exception to this, but I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market. But sooner or later they will find themselves in a similar situation as those who thought investing in Japanese Tech companies was a surefire way to beat the market 20-25 years ago. So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life. To everyone who is trying to get rich quick now: Do your thing I guess, but be aware that you're gambling.

mgh2 5y ago
Why is this the top comment? It is just an opinion without much analysis. Yes, there is gambling but there is also investing, knowing the difference is key.
dgb23 5y ago
Isn't there some qualitative difference between financially focused decision making and domain focused decision making when it comes to investing vs. gambling (as you say)? An expert in some particular field sees different opportunities and make strong educated guesses vs a trader who will react on financial metrics.
- cehrlich 5y ago
  To a certain extent yes, but don't fall into the trap of overestimating your own domain knowledge and underestimating that of others.
- Retr0id 5y ago
  Traders can hire domain-specific technical consultants.

nameisname 5y ago

I've seen a lot of pompous threads and misinformation masquerading as facts threads but this one takes the cake for both on HN for me. I've never seen so many people high on themselves for investing in Tesla and Apple. I feel sorry for the people who read these comments or have to talk to these people about the market. Insufferable.

ceasesurthinko 5y ago

The only thing that I need to know about the Stock Market is that you should buy SPY, change your brokerage account password, and never touch it until retirement age.

Accacin 5y ago

That was a really great article for someone who didn't know much about trading. Very easy to follow and I felt like I've actually learnt something. Thanks for submitting this (and writing it, author!).

da39a3ee 5y ago

> Here’s why stock markets rock: Is he writing for pre-teens?

Foivos 5y ago

One thing is not clear. If person A has 10 items and asks for $10 per item and person B wants only 7 items for $10 per item, what happens? Person A just sells the 7 items and then waits for somebody else to pick the remaining ones? And vice versa what happens if someone wants to buy more stocks than what is offered?

rcar1046 5y ago
Generally...he'll have to lower the price on the remaining 3 shares to sell them it looks like as there was only demand for 7 items @ $10. Or he can simply wait until someone values them at $10. Conversely, if someone is willing to buy more than is available, people will probably make more available, just at a higher price.
herodotus 5y ago
When you place a buy or sell order, you can specify "all or nothing" if that is what you want.
vishnugupta 5y ago
I suggest reading up Market Maker [1]. In most scenario (assuming good demand for the stock you are buying and a functional market etc.,) a market maker, looking at their order book, buys 7 items from A. They sit on it until they are able to dispose off them to a buyer. In effect, you, as a buyer is buying a stock from market maker. Most of the equity market is not P2P but mediated by market maker. They take the liquidity risk (i.e., holding a bad stock if demand plummets) and are rewarded for that by making money off of every transaction through bid-ask spread. Of course I'm greatly simplifying as an equity order goes through a bunch of intermediaries but Market Maker play a central role here. [1] https://www.investopedia.com/terms/m/marketmaker.asp https://www.investopedia.com/terms/m/marketmaker.asp
kbuck 5y ago
The orders are partially filled (either on the buy or sell side). What this means is that the shares eligible to transact do so immediately, and the remaining shares sit on the order book and wait for someone to be willing to trade at that price. There is a specific option that you can set (usually called "all or none") that will prohibit partially filling an order and only allow it to execute in entirety.

globular-toast 5y ago

Ah, I never fully understood how the market maker worked. I intuitively understood that buying/selling at market price gets you an instant trade at a possibly slightly worse price but didn't realise the market maker made money from that. One thing the article doesn't mention is why people buy and sell stocks. The stock market used to be for companies to raise funds before they turned a profit. Usually for businesses like railways which need huge amounts of capital before they can even begin to operate. Nowadays it's usually companies that are already profitable. Speculation is also a much bigger concern for people than it probably should be. It used to be that just owning a share in a company was good because a company is (hopefully) productive and pays you a dividend. Now people only seem to think about "beating the market" which is a shame, I think.

nly 5y ago
Stock markets allow for price discovery. The market gives a verdict on what it thinks stock in a given company is worth, and it's there in public for all to see. They also allow liquidity. A public company can't stop you from selling your stake, or buying more. This is something you'd definitely value if you've ever been screwed out of equity at a startup.

mizzao 5y ago

This article explains what the stock market pretends to be. This book explains what the stock market actually is: https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599 https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393... It's much less friendly than it seems and only "efficient" for a select few.

starkd 5y ago
I don't think that's the spirit in which the article was introduced. It's an educational piece. Of course, it's about the ideal scenario.
khold_stare 5y ago
I greatly enjoy Michael Lewis and his books, but Flash boys was extremely inaccurate, full of factual errors. I've worked in the finance industry, in HFT at one of the firms mentioned in the book. I joined around the time Flash Boys came out, and it was required reading in the firm. Here are some points: - Michael Lewis really only got one side of the story - that of Brad Katsuyama, who had a vested interest in casting HFT players in a bad light to promote his own business - building the new exchange IEX. - Brad also blamed HFTs for systems at RBC failing to make massive trades like they used to. There was nothing nefarious here - RBC had just fallen behind the time in technology, like trying to send a Fax in a world where everyone already uses Email. If Brad, or RBC, or RBC software engineers picked up the phone and called any of the exchanges, they would probably gladly update them on the industry and save them all the work of re-discovering it themselves. - The claims about front-running are completely false. Front running would mean that a market maker somehow knows someone's orders at two different exchanges and somehow is able to "get in front of the line" or even know that those orders belong to the same person. This would mean the exchanges leak information or allow certain users "ahead of the queue". None of this is true. What Michael Lewis called front-running, was HFT firms reducing their risk on other exchanges when they would get traded against on one exchange. They did this without any knowledge that Brad Katsuyama was on the other end, or that he was just late trying to make the same trade at another exchange at a later time. There are no guarantees that you can make the same trade at different exchanges - the same rules apply to everybody. - Unsurprisingly, IEX as an exchange is no different from others, in that they need market makers (a.k.a. HFTs) to provide liquidity on their exchange. I wrote the code for the FIX gateways to connect our firm to IEX, and it was all business as usual.

u2077 5y ago

Better explained has some great articles that are definitely worth checking out. RSS feed: http://feeds.feedburner.com/Betterexplained http://feeds.feedburner.com/Betterexplained

khold_stare 5y ago

Really great article! Very well explained. One small inaccuracy is the claim that there is only one place for each stock. That has not been true for many years. In the US that was changed by https://en.wikipedia.org/wiki/Regulation_NMS https://en.wikipedia.org/wiki/Regulation_NMS . NASDAQ is the primary listing exchange for MSFT, which means they will hold the opening and closing auctions, but it can be traded on any equities exchange, NYSE, IEX, BATS, EDGE-A, EDGE-X, you name it. RegNMS also has rules that if there is a better price at another exchange, the order must be routed there. This establishes the "NBBO" - National Best Bid and Offer, so in a way there is always one best bid and one best ask, but it's an aggregate over all the exchanges.

codeulike 5y ago

My theory is that finance is all about making things too hard to understand, so that fraud, monopolizing/size advantages and market manipulation are easier to get away with. Fifty years ago that was possible on the stock market because it wasn't open to the general public. During the 80s/90s it was opened up to consumers and since then (adjusted for inflation) it hasn't really gone anywhere. Profits have now moved elsewhere, to where the complexity and the hiding places are (hft, crypto, derivatives)

tim333 5y ago

This is a nice article but a bit beginnerish and gets facts wrong partly because the author seems a bit vague on the difference between a maker and taker in a transaction. The maker is the party that sits there waiting for bids and offers to come in and that taker is the party that doesn't wait and says buy this now or sell this now. The bid is the lower price that a maker offers to buy stock for and the ask is the higher price that they offer to sell it for. In the first example > What you can buy it for? (Your best bid) > What you can sell it for? (What you’d ask for it) They have it the wrong was around I think in that the amount you can buy an iphone for as a taker / customer is generally higher than what you can sell it for so what you can buy it for is the (dealers) ask price and what you can sell it for is their bid. If you are a dealer / maker with a stack of iphones sitting there then the higher price you offer to sell them for is what you ask and the bid is what you'll offer for people selling you their phones. There are some other simplifications too like "All prices are completely transparent." In an ideal world but in reality there are off market transactions, wash trading, faking and so on.

dragontamer 5y ago

For a fun graphic from the 1950s: https://news.ycombinator.com/item?id=29309175 https://news.ycombinator.com/item?id=29309175 "What makes us Tick" was a high-quality cartoon that explained the theory of the stock market, and the benefits of captitalism in general. Of course, its a Cold War era propaganda cartoon, but its still a really clear and simple explanation. The "Ticker Tape" may sound quaint, but "Market Makers" are really just those round-lot dealers that are discussed in the cartoon. The overall explanation remains valid for today's market, just with more automation / computers involved today rather than humans on a telephone.

cryptojournal 5y ago

I've missed this story!