This is a great article that explains markets (not just the stock market really) in an easy to understand way.<p>The one thing I believe people should know about the stock market is: There are people with more capital, time, and knowledge than you who will consistently beat you. Picking individual investments is mostly a sucker's game.<p>Buying tech stocks and/or crypto in the last couple of years has been a consistent exception to this, but I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market. But sooner or later they will find themselves in a similar situation as those who thought investing in Japanese Tech companies was a surefire way to beat the market 20-25 years ago.<p>So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life.<p>To everyone who is trying to get rich quick now: Do your thing I guess, but be aware that you're gambling.
One interesting thing about "highest bid" and "lowest ask" prices is that they can sometimes move up and down for days without a transaction ever happening.<p>This can be observed in certain illiquid markets, e.g. for a specific bond of a company. In those cases, the "last trade price" is meaningless and it's very important to instead look at the bids and asks in the order book.
You should probably get to know some critical aspects of markets too, this article just praises them. That is pretty much the norm, but I think it's a valuable educational endeavour to look at critiques of markets.
Really great article! Very well explained.<p>One small inaccuracy is the claim that there is only one place for each stock. That has not been true for many years. In the US that was changed by <a href="https://en.wikipedia.org/wiki/Regulation_NMS" rel="nofollow">https://en.wikipedia.org/wiki/Regulation_NMS</a> . NASDAQ is the primary listing exchange for MSFT, which means they will hold the opening and closing auctions, but it can be traded on any equities exchange, NYSE, IEX, BATS, EDGE-A, EDGE-X, you name it. RegNMS also has rules that if there is a better price at another exchange, the order must be routed there. This establishes the "NBBO" - National Best Bid and Offer, so in a way there is always one best bid and one best ask, but it's an aggregate over all the exchanges.
Well, that is how a basic orderbook works.<p>But US markets have some special Reg-NMS rules that glue together things across exchanges. Being from Europe I'm not so familiar with it, but I understand it causes some interesting games to be played.<p>If you want to actually understand how the market works, there's a fair bit more reading to do.
This is a nice article but a bit beginnerish and gets facts wrong partly because the author seems a bit vague on the difference between a maker and taker in a transaction. The maker is the party that sits there waiting for bids and offers to come in and that taker is the party that doesn't wait and says buy this now or sell this now. The bid is the lower price that a maker offers to buy stock for and the ask is the higher price that they offer to sell it for. In the first example<p>> What you can buy it for? (Your best bid)<p>> What you can sell it for? (What you’d ask for it)<p>They have it the wrong was around I think in that the amount you can buy an iphone for as a taker / customer is generally higher than what you can sell it for so what you can buy it for is the (dealers) ask price and what you can sell it for is their bid. If you are a dealer / maker with a stack of iphones sitting there then the higher price you offer to sell them for is what you ask and the bid is what you'll offer for people selling you their phones.<p>There are some other simplifications too like "All prices are completely transparent." In an ideal world but in reality there are off market transactions, wash trading, faking and so on.
One thing is not clear. If person A has 10 items and asks for $10 per item and person B wants only 7 items for $10 per item, what happens? Person A just sells the 7 items and then waits for somebody else to pick the remaining ones? And vice versa what happens if someone wants to buy more stocks than what is offered?
For a fun graphic from the 1950s: <a href="https://news.ycombinator.com/item?id=29309175" rel="nofollow">https://news.ycombinator.com/item?id=29309175</a><p>"What makes us Tick" was a high-quality cartoon that explained the theory of the stock market, and the benefits of captitalism in general. Of course, its a Cold War era propaganda cartoon, but its still a really clear and simple explanation.<p>The "Ticker Tape" may sound quaint, but "Market Makers" are really just those round-lot dealers that are discussed in the cartoon. The overall explanation remains valid for today's market, just with more automation / computers involved today rather than humans on a telephone.
Can anyone recommend a quality book with similar content? Mind you, not about investing strategies, but just basic facts about financial markets (including stocks and bonds). I’m fine with textbooks, provided they’re relatively easy reads, and under 500 pages.
Since this is mostly about one mechanical aspect of markets - what is a "bid/ask" spread - it applies beyond the stockmarket to crypto markets. Except those tend to have fewer rules about the order book.<p>If you're trading indirectly, which is not unusual with a brokerage, you should be aware of what is meant by "best execution", and I offer this article with an explanation in FX: <a href="https://medium.com/bull-market/oranges-and-lemons-the-fx-scandal-in-perspective-cd3456089ce4" rel="nofollow">https://medium.com/bull-market/oranges-and-lemons-the-fx-sca...</a>
Does anybody know what happens when the bid is not equal to but higher than the ask? What is the price that will be used? Or will this not lead to a transaction at all?
The article focuses on order book basics of matching buyers and sellers, which is a pretty small part of "understanding the stock market" for anyone who wants to invest.<p>I would also look at long-term history, business cycle (in the stock market terms), inflation and rates, liquidity crises as a background for investing. Those are much more valuable for an investor than order book details. My 2c.
Am I the only one in HN who is not into the stock market? I live in Western Europe and I would say 75% of my acquaintances don't do stock market. People I have known in the past (old people) didn't do stock market either. They all seem to have lived a normal life (decent jobs, decent house, decent family). Nothing extravagant but they got enough money to be "happy" in life.
Ah, I never fully understood how the market maker worked. I intuitively understood that buying/selling at market price gets you an instant trade at a possibly slightly worse price but didn't realise the market maker made money from that.<p>One thing the article doesn't mention is <i>why</i> people buy and sell stocks. The stock market used to be for companies to raise funds before they turned a profit. Usually for businesses like railways which need huge amounts of capital before they can even begin to operate. Nowadays it's usually companies that are already profitable. Speculation is also a much bigger concern for people than it probably should be. It used to be that just owning a share in a company was good because a company is (hopefully) productive and pays you a dividend. Now people only seem to think about "beating the market" which is a shame, I think.
That was a really great article for someone who didn't know much about trading. Very easy to follow and I felt like I've actually learnt something.<p>Thanks for submitting this (and writing it, author!).
Just curious:<p>Suppose there is some difference between buying price range and selling price range. The dealer (middle man) could become temporary in-between buyer or seller and take some of the profit due to this price difference.<p>For example this could happen at a stockbroker or at a crypto exchange.<p>Is this behavior regulated, and if so, how?
Better explained has some great articles that are definitely worth checking out.<p>RSS feed: <a href="http://feeds.feedburner.com/Betterexplained" rel="nofollow">http://feeds.feedburner.com/Betterexplained</a>
I have a book written by André Kostolany, which taught me <i>one</i> thing and I believe I've forgotten the rest, because only this one fundamentally matters:<p>Don't hunt for rising stocks, but chase the falling stocks. Everything that goes down either eventually goes up again, or dies.<p>While this sounds like it's not helpful, all that's required is figuring out if a company is likely going to die. Even without any manual research, <i>time</i> is ultimately telling. The longer a company at the bottom doesn't die, the more likely it's going to rebound eventually.<p><a href="https://en.wikipedia.org/wiki/Andr%C3%A9_Kostolany" rel="nofollow">https://en.wikipedia.org/wiki/Andr%C3%A9_Kostolany</a><p>PS: Don't gamble your life away.
the only thing you should know about the Stock Market: it favors those with more capital, if you don’t have much to begin with, don’t expect making life-changing amounts
My theory is that finance is all about making things too hard to understand, so that fraud, monopolizing/size advantages and market manipulation are easier to get away with. Fifty years ago that was possible on the stock market because it wasn't open to the general public. During the 80s/90s it was opened up to consumers and since then (adjusted for inflation) it hasn't really gone anywhere. Profits have now moved elsewhere, to where the complexity and the hiding places are (hft, crypto, derivatives)
This article explains what the stock market pretends to be.<p>This book explains what the stock market actually is: <a href="https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599" rel="nofollow">https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...</a><p>It's much less friendly than it seems and only "efficient" for a select few.
I've seen a lot of pompous threads and misinformation masquerading as facts threads but this one takes the cake for both on HN for me. I've never seen so many people high on themselves for investing in Tesla and Apple. I feel sorry for the people who read these comments or have to talk to these people about the market. Insufferable.
The only thing that I need to know about the Stock Market is that you should buy SPY, change your brokerage account password, and never touch it until retirement age.