Website owner:  James Miller

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The stock market

   How does one best understand the stock market?  What is the 
   basic mechanism that determines the prices of stocks?  That old 
   economic law: the law of supply and demand.  This is the basic, 
   underlying law.  What causes demand?  Mostly things like 
   investor optimism, confidence, general belief in stocks, 
   investor exuberance, and the availability of money.  And greed, 
   the attraction of making easy money.  What things cause the 
   lack of demand?  Pessimism, disillusionment, lack of confidence 
   in stocks.  And fear.  And panic.  The stock market is a public 
   auction and  the best way to understand it is to remember this.  
   The mechanism that determines the prices paid is that of any 
   auction --- the law of supply and demand.  Whether we are 
   speaking of auctioning horses, paintings, stocks, or whatever, 
   if there is a huge crowd of enthusiastic bidders, all 
   outbidding each other for something (i.e. the demand is great), 
   the price goes up;  and if there are few bidders and demand is 
   small, the price drops.  If everyone is in a mood to buy prices 
   go up and if few are in a mood to buy prices drop.  And if 
   everyone is in a panic to sell, and no-one wants to buy, prices 
   drop precipitously. 

   Some good, descriptive language of the stock market is phrased 
   in words like "bubbles" and "collapses".  Soap bubbles look big 
   and beautiful and then, without warning, they suddenly pop and 
   vanish;  what was big, beautiful and substantive is suddenly 
   nothing.  People with all their life savings in stocks can 
   suddenly see those savings disappear in a stock market crash --
   like a bursting soap bubble.  The stock market is about 
   developing bubbles and bursting bubbles, stock price inflation 
   and stock price deflation. 

   How about the techniques of stock fundamental analysis and the 
   attempt to find "value" in stocks and pick them on that basis?  
   I think it is mostly psychological factors, and the way these 
   factors influence demand, that determines how stocks perform.  
   And, if this is true, playing the stock market is very much a 
   game of chance and risk, a gambler's game, much akin to betting 
   on horses.    

   May 2000

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