Make Money On Other’s Emotions In The Stock Market

Written by: Samuel Gregoth
06/03/2019

stock-market-emotions

Gordon Gekko, the famous villain of the movie Wall Street once said the most valuable commodity was information. In many ways this is absolutely true. Anything related to money, whether you need to learn a trade, or learn how to get to a certain location, or you need a tip for something you want to invest in you need to have good information. Mentioning the movie Wall Street gives an appropriate introduction because information is its most valuable in the stock market. 

There are a myriad of ways you can use information in the stock market to make money. You can use earnings reports, SEC statements, and tips from analysts among many other methods of obtaining information about a stock. However you must understand that no amount of information will make up for a lack of decision-making ability. Before we get too deep into how to use information to make a decision on a stock, I would like to take some time to examine the motivation for the beginning of stock trading.
Stock markets weren’t always highly organized, efficient markets. In the early days stocks were based off of recording debts from farmers that were kept by the banks. These debts would be traded back and forth between banks and merchants. In the 1300s this type of system had been upgraded by the Venetian bankers to include trading of government securities. These trades were being done in all the major cities of Italy at the time.

The earliest example of what could be considered a stock market began in Antwerp, Belgium in the 14th century. In the beginning, companies were not traded. Most of the trading was of government and individual debt.
The first publicly traded stock was known as the East India Company. This time had seen an amount of unprecedented growth due to the exploration that was done when looking for new worlds in other continents. The “stock” was created to mitigate the risk of all the ships that could have been robbed, destroyed, or otherwise lost in transit. These financiers decided that instead of putting all their money into a whole group of ships that only had a 33% chance of returning with their cargo, these financiers decided to invest in companies of ships so that the companies that did better would make more money than the others. They named the stake in each company they invested in a “share”. They did this so that if one or two ships didn’t return,n they would still profit from the ones that did. Similar markets popped up in other countries in Europe and in 1602 the Dutch East India Company was born. At this point this company was the first one to issue publicly traded shares of stock to the general public.

At this time these markets were very unregulated, much like the crypto markets of today. A lot of people were putting a lot of money into a bunch of crazy ventures, often sight unseen. Companies could often be seen making thousands of pounds offering their shares to investors before the ships even left. At first, the trading was done in coffee shops, because this is where all sorts of trades dealing another items was done. Over time a neutral trading marketplace was created, and this is where people would trade their company stocks. All the haphazard investing caused the country of England to shut down trading in stocks in 1825 even though the London Stock Exchange had existed since 1801.
The shutdown of the English trading market prevented London from becoming the world’s biggest Financial Market. That honor was given instead to the New York Stock Exchange, that was founded in 1817. NYSE was the first pure stock exchange. While the New York Stock Exchange is the largest in the world, not only does it have competition from rival stock markets such as NASDAQ, there are now stock markets in countries all over the world. Even Iraq has its own stock market which actually saw an upswing during the 2008 financial crisis.

Why trade stock?

As you can tell from the history lesson in the previous paragraphs, stock markets primarily were founded so that people who have extra money could invest in projects and in the ventures that they either believe in, or they believe will make a lot of money. It is the speculative nature of the stock market which makes it alluring. Investing in the stock market has the same type of thrill that would be found in a casino. The difference between a casino and the stock market is that you have much more information at your disposal then you would placing a bet. This takes it out of being a game of chance and puts it in the same class of betting where analytics and study serve a purpose, like horse racing in betting on sports teams. But unlike the aforementioned Sports, stock prices can move by the feelings of other people, because it is the pooling of other people’s money into the particular stock which determines its price the more people buy a stock the highest price goes. And the price goes down when people sell. Sports teams don’t necessarily get better or worse due to ticket sales, but stock prices do.

Downsides

Because the market movement is dictated by the feelings of others this can have dangerous effects on stocks in the stock market. One such danger is the stock market crash. These crashes happen regularly and they are created by speculative bubbles that bring the value of a stock much higher than what it is actually worth. The correction can then cause a panic which becomes a crash. The most notable crashes include the one in 1929, which fueled a global depression and the recent one in 2008, fueled by a housing bubble. Most markets are attempting to mitigate the effects of such crashes by implementing a “pull the plug” protocol that shuts the markets down after a certain percentage drop of their biggest indexes
While a stock market crash can cause a lot of people at once to lose a lot of money there is also the risk of anyone at any time losing their shirt and everything they own. Due to using bad advice or making bad decisions or taking money out over the market too often to buy liabilities, a person can lose in the market. In fact, only a small percentage make consistent profits in the stock market. Stock Investing has a steep learning curve, And it is not for the faint of heart.

Why I like the market

I personally like investing in markets because I get to contribute to a company’s story. These ticker symbols are more than letters, they can bring you to an understanding of how something was created by a group of people and you get to learn just how large your country’s economy is. They were anywhere between 10000 and 20000 stocks traded amongst the financial markets in America alone. That is a lot of different stories where founders create something the benefits so many in their community. I am also given the ability to test my thinking skills, analytical abilities and my decision-making abilities to be able to create an income for myself. Not everyone can work with their hands and be successful, but if one can work with their mind and be successful in any kind of way this is a good thing.


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