How the Stock Market Works

Getting started in the stock market is like the beginning of a great and terrible journey, like ‘Jason and the Argonauts’ or ‘2001’. What seems like such a simple proposition can become as grand as the very battle of the soul. For the novice, just entering the market can be a daunting process. From the outside, the market appears a frightening tangle of archaic symbols, fractions, and code. It is this way for a reason. The stock market is built not unlike the church of the middle ages, where the liturgies and readings were only read in Latin, even though the masses of men were unable to understand. Thereby establishing an expert’ priestly caste to decipher the undecipherable. Wall Street has its own priestly caste that proclaim knowledge and understanding of the market and can often be seen making pronouncements like ‘the market is up on…’ These supposed truths will suddenly vanish when the market stops and turns on a dime, and then a new reason is given ‘the market is down on…’ Often they appear on CNBC as prognosticators or hedge fund managers with important pedigrees. Pay them no mind, they are salesmen like the rest and their claim of knowledge is no closer to true, then the priests claim of having knowledge of God just by knowing Latin.

The stock market most resembles a craps table, where an infinite variety of plays can be tried on a constant rolling of the dice. Up (going long or buying stock), down (Going short, or selling stock-to be bought back later at a lesser price), sideways or standing still (option plays where said trader can play for no movement at all in the stock), any possible movement can be played in the market, and therein lies one of its great beauties. The stock market is not merely a bus to be hopped on going forward. Supply and Demand are akin to an Aesop fable told in 4th grade English class. Everything is there; every possible philosophical idea on the state of man can be taken and converted into a play. The market is a breathtaking display of mans beliefs, translated into an endlessly twitching motion of numbers. In order to cut through the jargon and begin to understand the market, it is important for the beginnings of a passion to develop. With the passion, it will require less than a high school education to understand the workings of the market.

One of the first rules of information is you get what you pay for. If your sources cost less than a dollar i.e. newspapers, and TV, their recommendations are probably more hazardous than helpful. Find an area you have some exposure too or some personal interest in. If you are interested in cars, look into the automotive industry. An addendum to this rule is, be cautious, just because you feel strongly about a company within an industry it may not be the time to buy. Every stock has its downswings; Google dropped $80 in less than a month. You may be right, but you may not have the stomach to watch it drop and drop and drop. Often times you will watch it sink apparently to the bottom of the earth, and just when you’ve had enough, and pulled the plug, it will miraculously come back to life and shoot up like you always knew it would.
The market will try your soul.

What every trader looks for is a road map. The road map will give you indications where a stocks top and bottom is, the road map is commonly referred to as a stocks technicals (graphs and charts of the stocks past movement). The technical trader believes that stocks are not on a random walk, but instead their future is their past. Or at least the past is an indication. Learning technicals can help you see when a stock is about to fall, and when that fall is leading to a good time to buy. An old axiom of the market is When there’s blood in the streets, it’s time to by.’ Again, a Herculean trial of the soul, to buy when things are at their worst. This is what’s meant by picking bottoms. Finally what may be considered unseemly business’ Defense, arms, cigarettes, pesticides, etc. seem to be the strongest buys. So, if you find a company that you find morally reprehensible, it might be something to invest in.

Ultimately, one of the hardest tests of a trader is their ability to stand up and walk away from the losses, and that struggle to turn away is even greater when selling a stock on its way up. To take a 2-dollar profit from a stock and then watch it blast up another 15 dollars is a different sort of excruciation. You will find yourself on the sidelines yearning to get back in. This is the greatest test, setting up your limits and sticking to them. The struggle of walking away with either losses or wins is, in the end, the greatest struggle of the traders will. The action of being involved will become its own towering addiction, and this is why a traders most important rule when entering a stock is to know where they will get out on the upside or, on the downside.