definition – stock market:
The stock market refers to the collection of markets and exchanges where buying, selling, and issuance of stock of publicly-held companies takes place. These activities are conducted through either an exchange or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock markets in a country or a region which allow transactions in stocks and other forms of securities.
Trade in stock markets means the transfer (in exchange for money) of a stock or security from a seller to a buyer. This requires these two parties to agree on a price. A stock market can be a physical location, where transactions are carried out on a trading floor. Some stock markets and commodities exchange use this method(known as open outcry), and it involves traders shouting bid and offer prices. The other type of stock market has a network of computers where trades are made electronically. An example of such a market is the NASDAQ stock exchange.
history of the stock market
There had been numerous attempts at building a joint stock market in many countries and civilisations. However, a true legitimate stock market(secondary market to buy & sell shares of limited stock) in the form and structure that we are familiar with today, was formed in 1602. This was a result of the formation of world’s first joint stock company – The Dutch East India Company, also in 1602. The Dutch East India Company, also happens to be the most valuable company in the history of human existence. Valued at $8.2 trillion in today’s money. This is equivalent to the combined GDPs of Germany, UK and France at the time of writing this article(2020).
The secondary market for shares was established in year 1611 in Amsterdam to finance expansion of Dutch industrial empire.
One of the first ever stock certificate issued, on 9-Sep-1606. You can see ownership certificate on the left page. And the dates for stock events(dividends, sale purchase) on the right hand page, along with stock price for that transaction.
the mechanism
The Participants in the stock market range from small individual stock investors to larger institutional investors, who can be based anywhere in the world, and may include banks, insurance companies, pension funds and hedge funds.
A potential buyer bids a specific price for a stock, and a potential seller asks a specific price for the same stock. Buying or selling at the market means you will accept any ask price or bid price for the stock. When the bid and ask prices match, a sale takes place, on a first-come, first-served basis if there are multiple bidders at a given price. This process is followed whether the stock market is a physical or electronic venue.
Liquidity is a key consideration for any stock market. Therefore, people trading stock will prefer to trade on the most popular exchange. This is because, it gives the largest number of potential counter parties (buyers for a seller, sellers for a buyer). In addition it generally gives the buyer and the seller, the best price. However, there have always been alternatives, such as brokers trying to bring parties together to trade outside the exchange. For instance, some such popular markets are Instinet, and later Island and Archipelago. Although, NASDAQ and NYSE have acquired the latter two , respectively. One advantage is that this avoids the commissions of the exchange. On the other hand, it also has problems such as adverse selection.
stock market index
A Stock Market Index captures the movements of the prices in global, regional or local stock market. For instance, the Dow Jones, S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
variables and factors to monitor
currency rate in fx markets
Firstly, the stocks are quoted in the currency of the stock market domicile. For instance NASDAQ will have stocks quoted in USD. Hence, as the currency appreciates in value, this causes a drop in foreign investment, since foreign investors get less USD for their currency. Hence, large global investors will not use their USD reserves to buy NASDAQ stocks. But, convert USD into their local currency as they will get more of their local currency per US Dollar. On the other hand, depreciation of USD will make NASDAQ stocks cheaper. Hence, NASDAQ index will rise in this scenario.
inflation
Secondly, using the same example of NASDAQ and USD, higher inflation means depreciation in the value of USD and that the US companies are able to sell their goods and services at higher prices. Therefore, the stock index will rise, as constituent companies are bringing in more cash. However, this will then, translate to higher employee wages and higher cost of goods and raw materials. Hence, high inflation over a sustained period of time, will cause longer dated Futures contract to drop in price.
interest rates
Thirdly, short and medium term interest rates spike will impact the local stock market. This is because higher rates will mean a (relatively)risk free alternative to stocks – a more risky asset, in the short term. Hence, this will cause stock market index to drop. However, long term high rates will lower bond yields and therefore, the large investors’ money will move to stocks, causing stock market index to spike.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact stocks. For instance, high unemployment rate will imply lower disposable incomes. Consequently, this will lead to a drop in consumer demand and this would cause a downward trend for stocks. In contrast, a higher PMI will mean an increase in economic activity, leading to higher employment and a high demand for goods and services produced by companies listed on that stock market.
final comments
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction using algorithms based on all factors that impact stock market index price. Then, it evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.