I, Faceless Trader, was asked to make an article for newbies – to anyone who has never heard about the stock market in the first place. To me, this is a very difficult thing to do as I might not be able to relate well but I will do my best to give you a big picture understanding of the markets without boring you nor assuming too much.
The concept of trading is not hard to understand. Number One Rule: Every transaction involves a buyer and a seller. You can easily see that whenever you’re going to a supermarket ( a modern day public market) or simply a wet market. You’re the buyer. Someone else is the seller. The shop keeper gives you a price. You haggle if there’s tawaran. (That’s called bidding – since you’re trying to get the lowest price). She’s also making tawaran (since she’s asking if you can pay a certain price as well). Both of you haggle onto each other until you both decide – deal. That transaction is a perfect example of TRADING. A Transaction between a buyer and a seller. 🙂 Perfect.
Bid- Buyer Side
Ask – Seller Side
Concept Number 2: Prices Don’t Stay The Same. It Changes.
Did you notice that whenever it’s Valentines day or Mother’s day that the prices of flowers significantly goes up? I know you know why. It’s simple isn’t it? We all decide to buy flowers for our special loved ones all at the same time so the increased demand allows the seller (the flower shop keeper) to raise the prices and we will still buy until it’s so expensive that we cannot afford any longer – and we resist.
This concept that we know in real life is the same thing in Trading. You will notice that there are days when a significant number of buyers wants to buy roses (in the trading world, we call these roses as stocks in general) all at the same time and those who have the roses can easily make a profit by simply placing a 5% profit spread. Sometimes 10%, sometimes 20%, 30%, 50% and so forth. The Regulations committee however in the Philippines rules that the owners cannot raise prices beyond 50% at least for the day. In other markets, there are no such things as limits to how high or how low the prices can become. In the Philippines, it’s a maximum drop of 50% or a maximum rise of 50% only in a given day no matter how many wants to buy or sell.
The concept of “RESIST” is something I need to expound upon. We “RESIST” We fight!. We Hate. This is the “ceiling” price. This is a price where nobody wants to buy any longer. After some time, no matter how much we want to buy roses for our loved ones, if the seller is absurd and will only sell us roses for a hundred thousand pesos, we will not buy.
You would be surprised that in history, a different flower called “TULIPS” actually fetched a price as high as TEN TIMES your salary as a skilled craftsmen. Amazing fact! If you wish to learn more, I think you should check out these damn interesting things that happened in our history. In fact, even after 400 years, we are still experiencing these “market manias” that inspired plenty of crashes afterwards. Whether you’re new or not, you need to understand that there are times when EVERYONE WANTS TO BUY ROSES or TULIPS during 1637.
Here’s an excerpt from Damn Interesting Facts. http://www.damninteresting.com/the-dutch-tulip-bubble-of-1637/
One particularly amusing exchange showed the goods traded for one bulb – the lengthy list includes among other things: a bed, a complete suit of clothes, and a thousand pounds of cheese. At the height of the mania, in what seems a complete loss of sanity, the bulbs were deemed too valuable to risk planting by their (formerly) wealthy purchasers, and it became popular to display the plain ungrown bulbs. In at least one instance the plan for safety backfired when a visiting sailor mistook a tulip bulb for an onion, and proceeded to eat it for breakfast.
The height of the bubble was reached in the winter of 1636-37. Tulip traders were making (and losing) fortunes regularly. A good trader could earn up to 60,000 florins in a month— approximately $61,710 adjusted to current U.S. dollars. With profits like those to be had, nothing local governments could do stopped the frenzy of trading. Then one day in Haarlem a buyer failed to show up and pay for his bulb purchase. The ensuing panic spread across Holland, and within days tulip bulbs were worth only a hundredth of their former prices. The tulip bubble had burst.
You learn plenty of concepts here.
Concept Number 2: People Buying Goods ALL AT THE SAME TIME increases demand for the good and hence the seller can raise the prices. Prices for these goods rise. However at some point, there is a price where everyone RESISTS and stops buying. We call that price a RESISTANCE. That’s the TOP. That’s the highest price it can go.
Concept Number 3: Rising Prices Begets Mania and Generations Show Absurdity ALWAYS Happens.
When people buy all at the same time, prices rise and it can all happen in a sudden causing extraordinary rises in prices further inducing the mania. People in 1637 have traded tulip bulbs to as high as $60,000 so there’s no such thing as too high a price UNTIL no one else buys – and you see a CRASH. It’s important to note that as long as there is a buyer, no matter if the price of a tulip bulb may be EXTRAORDINARILY absurd, there’s no such thing as an absurd price when there’s a buyer. Intiendes? 😀
Because people are always trading goods every day and the prices change every day, some people felt it was tedious to write in a blackboard the prices and came up with a more visually appealing manner. You’d learn that the point and figure charting history was Xs and Os because it became quite a task to take note of the prices of so many things all at the same time. Basically Charts were created FOR CONVENIENCE sake. Obviously a visual representation of data makes it easy to see if the prices are going up or going down or staying constant. Now you learn Concept 4: Charts are Used Simply to Check if Price Goes Up, Down or Sideways.
History shows many visual representations of price movements. Some use a timeframe of how the prices moved in a day, in a week, in a month or in a year. However, some people put a great deal of time in looking at how prices move in a single minute, in five minutes, fifteen minutes, an hour and so forth. Concept 5: A Chart is a Visual Representation of Price Changes and Must be Evaluated in Different Time Frames.
Perhaps people also realized that if there were millions of people buying roses for 10 pesos a piece, that this transaction volume is worth analyzing versus one person buying a tulip bulb for P2.5 million apiece.
Concept 6: A Transaction Between MANY BUYERS AND SELLERS (Volume) is a more believable transaction versus a transaction between One Buyer and Many Sellers. Analyzing Prices without Analyzing Volume is useless unless the market for that good is ALWAYS trading at very high volumes such as the currency market. You’d realize that if the average trading volume for a certain rose is always just 40,000 versus other roses that trade in millions that it’s difficult to find a buyer when you’re selling. When it’s difficult to find a buyer, you’re forced to sell low. However, when there’s scarcity and only 40,000 of you who have that rose and there are millions who’d like to buy those roses, you can easily sell it extraordinarily high because you’re the only person amongst the other 40,000 who’d like to lose the rose for a price of a hundred thousand pesos.
We touched on Concept 7: Liquidity Refers to the Abundance of Volume for the Transactions Taking Place. The More Liquid – The More Difficult to Cause an Extraordinary Rise and Fall in Price.
The stock market is your normal neighborhood. In our day and age, you don’t need to haggle with your shopkeeper. The shopkeeper is Philippine Stock Exchange. Every buyer and seller can trade goods online. To protect the integrity of the market, the shop keeper makes complete transparency of the volume of transactions done and the prices they are bought and sold. You won’t know if Aling Nena sold you the stock. You won’t know if Aling Nena bought your stocks. All you’d know is a transaction takes place. These things happen fast. There’s an average of 5-6 Billion pesos traded in a single day in the stock exchange comprising of multiple goods *stocks of companies*. Everyone has to pay the shop keeper the SCCT Tax when they buy or sell, they also need to pay VAT during selling. The lowest transaction rate in the Philippines for buying and selling any good is 1.09% no matter which tindero (brokerage firm) you go to.
Hope a newbie learned something ,
I’ll explain more stock market concepts soon as I’m going to do this for BookAKA to help illumine how the stock market works that will be easily understood by all our kababayans.
-FacelessTrader (for BookAKA)