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Have you ever wondered how does the stock market works? In this video, I’ll explain what drives stock prices, why do they go up and down, and what should you do with all this information.
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0:00 – Intro
0:51 – Why does stock prices move?
A quick Google search will show you it’s driven by supply and demand, which isn’t helpful at all. A common misconception is that stock price is where we can buy the stock, which isn’t true. Instead, the stock price is the price where the last transaction took place.
Because everyone has different information of the company, different perception of the stock, that means that everyone will have different prices they are willing to pay. For example, you can try to buy Tesla at $50 but no one would want to sell at that price. Or you can try to sell Tesla at $10k, but no one will want to buy at the price either. That’s the beauty of supply and demand in the free market. All of us will only pay the price we are comfortable with, and this is what determines the stock price.
This is based on something called Efficient Market Hypothesis. It says that stocks will always trade at their fair value based on all information available.
4:27 – Limit order book
All these buy sell transactions are handled by a limit order book. In it, we will have buy queues and sell queues. Whenever we buy or sell a stock, we will join the queue at the specified price. If you wish to cut queue, you can use market order to get the best possible price.
7:11 – What drives stock price
Stock prices are driven by fundamentals, used mainly by long term investors. They will use many different ratios to value a stock, whether its cheap or not.
Stock prices are also driven by technicals, used mainly by momentum traders, this has a larger effect on stock prices in the short term.
9:15 – Is stock price important?
It’s important for short term investors, as every cent is important to ensure profits. For long term investors, it’s not as important because stock prices will always reflect its true value in the long term. As Benjamin Graham once said: “In the short run, the market is a voting machine. But in the long run, it is a weighing machine.” There may be ups and downs in the short term, but if the stock is good, it will only go up in the long term.