In my previous post about share market trading, I briefly defined what a market was, and revisited the traditional concept of a market. We saw how financial markets are a specialized form of market.
This post continues in the vein of assuming that the reader has absolutely no experience of share markets or financial markets in general. The examples and metaphors used in this post are intentionally simplistic – as I am making no assumptions of any prior knowledge of share market trading and/or investing by the reader.
As we progress into these series of posts, the material will get progressively “more substantial” – and so for readers “chomping at the bits” and saying – “just show me how to trade already”, I say: “just bear with me”. Incidentally, impatience in a trader/investor is potentially, a fatal character flaw (financial speaking), as we shall see later on as we progress in this discourse.
Financial markets can often seem a daunting place (and with good reason too) – although the media probably has a role to play in exaggerating the excesses that financial markets (and their participants) so often partake in. Having said that, it is still important however, not to lose sight of the fact that at the end of the day, financial markets are still markets and are subject to the same basic twin primal emotions of men – greed and fear. That much is unchanged, and probably never will, as men are creatures of emotion not logic (as many of us would desperately like to believe).
A suitable metaphor for financial markets is the concept of a shopping mall. Lets imagine a fictitious shopping mall – the financial widgets shopping mall (FW mall). This mall is composed of several shops – of differing sizes. There are the general merchants, and there are the small boutique shops.
The only differences between our shopping mall and a real life shopping mall are:
some shops in the FW mall will allow you to sell an item that you don’t yet own, after they have done a credit check on you and taken a small security deposit (this is an important attribute of financial markets that we will come to later on in these series. The industry terminology for this, is “short selling” or “going short”)
shops in the FW mall buy and sell financial instruments (instead of the typical merchandise of shoes, handbags or food etc.).
In each of the shops in our mall, you will notice that they have a different type of clientele (i.e. customers/shoppers). Some shops have customers/shoppers who are youngsters, others are more middle-aged, and other may cater for say older ladies. The clientele in different shops tend to behave in different ways, so each of the different shops will have a different mentality or ‘atmosphere’ based on its clientele.
Financial markets are also (to an extent), similarly fragmented in terms of the type of market participants they attract. Market participants have different levels of appetites for risk for example, and it is therefore understandable that they maybe attracted to different markets because aspects of the market matches their risk profile. For example, pension funds etc. tend to be “over represented” in the fixed income (i.e. bond/debt) markets.
When shopping at the FW mall, it is always important to maintain a birds eye view of the various shops and see how the various shoppers are acting. For example if there is a stampede in one shop, and a lot of shoppers come fleeing from one shop, there is a good chance that they may rush into the shop that you are interested in, and start buying up everything in your market (erm, shop) – which will obviously have the effect of pushing prices up in your shop.
Of course, the reverse could also be true, where people in your shop suddenly panic and sell everything they have bought in the shop your are in (thus depressing the prices in the store), because they have heard that they can get better deals in another shop.
If you are not keeping a beady eye on what is going on in the other shops, you could (actually WILL) be caught off guard several times. The key thing to successful trading and investing in the share markets is to be able to successfully anticipate (NOT PREDICT) what is most like to happen next.
On the subject of prediction. Here is a tip: If anyone offers to sell you a course or system that mentions the word “PREDICT”, you can immediately terminate the dialogue with impunity, as you would be saving yourself time, money and possibly no end of hassle.
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