The new forums will be named Coin Return (based on the most recent vote)! You can check on the status and timeline of the transition to the new forums here.
The Guiding Principles and New Rules document is now in effect.
How does wall street work?
Casually Hardcore
Once an Asshole. Trying to be better.Registered User regular
Once an Asshole. Trying to be better.Registered User regular
So I see, on t.v. and movies, guys in suit screaming in a super crowded room 'buy buy buy! Sell! Buy!'.
How does this work? Who's keeping track of selling and buying?
And if I own stocks in oil, why does my money in oil increase in value? Like if I buy a barrel of oil for $30, it doesn't stay in a warehouse for decades untill I want to sell it. So who keeps track of who owe what barrel of oil?
How does this work? Who's keeping track of selling and buying?
And if I own stocks in oil, why does my money in oil increase in value? Like if I buy a barrel of oil for $30, it doesn't stay in a warehouse for decades untill I want to sell it. So who keeps track of who owe what barrel of oil?
Casually Hardcore on
0
Posts
If you own stock in an oil company, you own a tiny percentage of that company and are entitled to a proportional share of that oil company's profits. If the company pays a dividend, your share of the operating profits for the dividend period will go to you directly. If it reinvests the profits, you get the money in a higher stock price when you sell. Because people know, or think they know, which companies will be profitable, future profit expectations are often priced into the stock already, so profit is weighed against expectations.
This is something you may want to check out is the government's investor website which provides this information for free:
https://www.investor.gov/introduction-investing/basics/how-stock-markets-work
The short answer to the first two questions: Bots.
The long answer: Humans don't have anything to do with the buying and selling of stocks anymore, it's all being run by an ever-increasing array of bots. Bots to buy stocks, bots to sell stocks, bots to monitor the nanosecond fluctuations of the markets caused by the other bots. Bots to monitor those other bots and make sure they don't do haywire. Bots to watch the news. Bots to make predictions. Bots to suggest stocks to buy and sell to the other bots which are vetted by more bots. Those scenes of the New York Stock Exchange filled with people and clamor? A thing of the past. It's relatively quiet now and almost empty, because the bots are running the show far faster than humans can even react. Entire companies treat their bots with a kind of reverence, an avatar of capitalism they worship in hopes of a good harvest.
ed: I just googled and Boiler Room actually depicts a brokerage firm, but the basic function is the same
the people who keep track of the transactions are the banks themselves; all parties keep records and if there's a dispute they go to court (more likely arbitration, but whatever)
commodities (i.e. oil) are different; you would not own stock in 'oil.' The lay investor probably does not own any commodities or futures (the right to buy in the future at a price set now) but if somehow you did, you would indeed own a barrel of oil in a warehouse (probably actually a tanker) somewhere, and you'd be concerned about to whom you might sell it.
that's why we call it the struggle, you're supposed to sweat
"Hey, that guy just sold a billion stock in XYZ?! WE SHOULD SELL ALL OUR SHIT!"
and then causing a panic where everyone is trying to sell their stuff?
Funny you should mention that...
My (extremely basic) layman’s understanding is that that is sort of what happened earlier this week when the DOW took a big hit and started the current slide. Then it activated the previously mentioned bots that were programmed to start auto selling when certain criteria were met.
Are you asking "what's to stop people from spreading false rumors about a big sale?"
That's market manipulation, it's fraud, and it's illegal.
If there actually is a big sale, and those rumors are true, and it triggers more sales - that's literally what a stock market crash is.
There are various rules and mechanisms in place to limit how bad crashes can get. Some of them are by law. The most important ones will literally halt all trading for a certain period of time (anywhere from 15m to a day) if the stock market drops too fast.
Keep in mind that other economically developed countries have their own stock exchanges, and they have similar rules set up.
Meanwhile there are bargain hunters who recognize that no matter how badly the market crashes, it eventually recovers... even if it takes years. They'll swoop in and start buying when a crash happens.
the "no true scotch man" fallacy.
Snark answer: it doesn't.
Real answer is what people were saying about bots earlier, but the bots are programmed to monitor a lot of things, not just stocks and their prices. For instance, a lot of them follow news Twitter feeds and buy and sell based on key words skimmed off those. It's caused flash crashes before, like a few years ago when AP's account was hacked to say that there had been an explosion at the White House and the stock market crashed for fifteen minutes until it was corrected. People can probably go in and do manual overrides of selling programs but that takes time and the bots can do thousands of transactions per second. A crash can happen faster than a human can react.
So most of the information is stored on databases. There are very little physical stocks being stored. Brokers and Banks (who act as transfer agents) keep track of the stock and it is routinely validated.
For the oil commodity specifically. You can trade for spot contracts or part of it and that's literally oil barrels in a warehouse, you've got the contract you have a week to pick it up. Forward contracts is more common, where a company is like I'll deliver ten thousand barrels of oil in one year, but in one year unless they want the oil they just create a new contract. It gets real weird with Exchange traded funds based on commodities, but at their base there is a contract to supply a certain good at a certain time to whoever is holding the contract.
And there are traders, who specialize in buying those contracts if their price is lower than what they can sell them for taking delivery and reselling the commodity on the open market hoping to arbitrage. It's actually pretty common with lumber and precious metals, but you have to have a strong logistics network in place and know what you are doing.
My confusion in commodity is like this. I buy $100 worth of grain on fidelity.com (or something). Obviously, $100 worth of grain isn't going to be shipped to my house. So do I just 'own' $100 worth of grain indefinitely until I decide to sell a 'stock' of grain? Is it all abstract? So what happens if there's not enough grain to cover everyone who owns stocks of grain?
Ye olde grain futures would have you pay the farmer/corporation/co-op to purchase the first 100 bushels of next year's crop at a set amount now, betting that the price the farmer would be willing to sell for now (to cover their between-crop fallow season) would be far less than in the following year. If there was a famine and less than 100 bushels were produced, most contracts would either A) be void at the end of the season (you get what you got) or
More often, the quality of the crop would be the problem. Maybe the first 100 bushels are yours, but the quality was poor (whelp, you are selling for the same as you bought or less). Or maybe you bought those bushels, the quality is fine, but there is elsewhere a widespread shortage of grain (suddenly your 100 bushels are solid gold as some of the only grain on the market in massive demand). For futures, this was the ideal situation. To buy hoping your grain would still be good but everyone else's would be of low quality or there be a widespread famine. Or (better yet) a war, causing the military to buy up as much grainstuff as possible.
The current systems don't follow that precisely anymore, as things are more abstract and fungible. You won't have a season where there is no grain, and as grain is produced everywhere at all times of year now the market is more volatile based upon the current supply.
If in your example the issuer cannot get the grain (which rarely happens) they go to prison for fraud. It's one of the few areas where the issuer, or the backing bank will jump through hoops to make sure your commodity is actually available. Even at a loss, because they stand to loose a lot more if they don't.
Like I said other than specialists who are looking to arbitrage, almost nobody ever takes the commodity. Also interesting if you get enough stock in a exchange traded fund to make up a unit (usually 10 thousand 50 thousand or 100 thousand). You can have that fund split up and take possessions of the individual funds that made up the ETF.
Tulip Mania also has some implications with the Blockchain situation we have now (along with pretty much all bubbles).
Theoretically, yes. However:
1) That is illegal market manipulation, so if anybody discovers that they did it deliberately, they could get fined or even go to jail.
2) Most people don't own enough of a stock to have that much of an effect. For example, there are 29 million Apple stocks in circulation. How many do you think you'd have to sell to cause a panic? 1 million? 5 million?
3) The largest shareholders of a stock are almost always the CEO, executives, and large investors. For example, the current CEO of Apple owns about 1 million Apple stocks. Except in very unusual situations, these are people who want that stock to succeed.
4) The trading behavior of CEOs and other executives is tightly scrutinized for insider trading. That kind of manipulative activity would be discovered.
5) Most investors base their buy and sell positions on a lot more than just recent activity. They're looking at long term profit and loss projections, how well that industry is doing overall, that company's real assets, and more. If a company seems to be doing well in profits and assets but their stock is strangely low, that's going to attract investors who want to buy it.
Regarding (5), that's relevant to current stock market activity. For the last few years, analysts have been noticing that companies who aren't doing that great in terms of actual profits or assets still have popular valuable stocks. They're "overvalued." Sometimes the company is doing fine, but the stock value has shot up astronomically because of rampant speculation. Arguably, the best example is Twitter, but there's been a good argument that almost the entire stock market has become overvalued since 2010 or 2011.
When overvalued stocks falter, that's called a "correction." The stock price is returning to a level that better reflects the actual value of that stock.
That's what we've been seeing this week with the US stock market.
Commodities =/= stocks. I think you know that already, but using the term "stock" when you're talking about commodities is confusing.
Yes, when you buy a commodity, you are either buying:
1) Some amount of a physical commodity that you now own, that's sitting in warehouse somewhere, and you can arrange for physical delivery of that commodity if you want. (Sometimes. Some commodities assume that you will never take physical delivery. Cattle and pigs are usually like that.) Most commodities are never actually physical delivered; they're just sold back to the producer or to the next investor.
2) More commonly, what you're buying is a "future" which is a legal contract that says you will buy some amount of that commodity at a certain date at a predetermined price. A future works a little bit like a down payment: I put down 10% of the price of a barrel of oil with a promise to buy that barrel in six months. (I might take physical delivery of that barrel, but probably not.)
Commodities trading is high-risk and is much more volatile than stock market trading. It also requires close attention to the specific commodity being trade. In general, the only people trading in (for example) oil commodities are either professional investors or people who have in-depth expertise with the oil industry.
Keep in mind that you can buy stock in an industry separately from commodities. If I buy 10,000 stocks in British Petroleum (for example), I'm investing in BP as a company. I don't own any oil directly. This is generally better for me as a casual investor: BP doesn't just own oil, it also owns natural gas, some wind power plants, real estate, patents, and other assets. If the oil market crashes, BP will take a hit... but I won't lose as much money as I would have if I'd bought oil commodities instead.
the "no true scotch man" fallacy.
This is why the idea of a penny transaction tax has been popping up a lot in recent years. Bots basically rely on arbitrage at the sub-cent level these days to make a profit, and a properly designed transaction tax would make that utterly infeasable.
The fuck?
But the long and the short of it is, the market valuations are pretty much mind games, they only represent perceived value, and rarely represent actual value.
In Nicholas Nickleby a con artist convinces folks that an existent Muffin Company, that sells quality baked goods, is going to open another branch that will deliver muffins to those who are hungry (akin to Grubhub, only in the Victorian Era). This, being of course a genius idea, gets insane amount of backing and the stock in the company goes insanely high. At which point the con artist sells off his shares and vanishes, the company owner (confused) explains that won't be happening, causing the value of his company to crash far below the original and leads him to be sent to debtor's prison, and leads the prominent in society to subsidize the company through parliament laws to mandate muffins be delivered to some folks who have to buy them (so the politicians keep their funds and can eventually divest).
Its a silly, fictional, largely unnecessary part of the novel but painted a very real picture of the early Stock Market in Dickens' era and how it operates to this day. We have a lot of laws to prevent this sort of behavior, but boiler room scams persist to this day and with bots it makes it very difficult to track or anticipate a pump-n-dump by speculators.
A stock is just a tiny investment in a company. I'm giving some money to that company now, betting that they'll grow in the future. Later on, I hope that growth was strong enough that I can sell that stock for more than I paid for it. Some stocks also carry a legal promise to give a tiny piece of their profits back to me from time to time (called a dividend).
When I buy one Apple stock, I own one 29,000,000th piece of Apple.
In the ideal world, the way this is supposed to work, 1/29millionth of Apple is reasonably priced based on Apple's real assets and some sensible profit projections.
Most of the time that is how it works.
But just like any other time anybody is buying and selling and haggling, if I can convince you that Apple is worth a lot more, then maybe I can sell the stock for a higher price.
That's where the mindgames come in.
As Abraham Lincoln supposedly said, “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.”
Eventually overvalued stocks will correct to a more reality-based price. Despite all the psychology and irrationality and mindgames, a company still needs to eventually turn a profit, it still has to show that it owns actual assets (like products or patents or real estate). Sometimes the mindgames can go on for years but on a long enough time frame, reality takes over.
the "no true scotch man" fallacy.
Experts on both sides of the spectrum are both predicting a rise to $50,000 a bitcoin and $0 a bitcoin. As well as advertisements telling you about the real scoop and insider information.
Because bitcoins have not been formally classified as currency or commodity, these types of attempted manipulations are unregulated.
But is my 401k dependent on a bunch of people making the right/lucky choices?
Retiring on your 401k is predicated on the idea that markets will indefinitely (or at least for the course of your life) grow. It's not an unreasonable assumption.
If your retirement is staked significantly on individual decisions you are probably not diversified enough (ie. own a selection of stocks/bonds/whatever with values which are uncorrelated enough)
Since you are presumably not close to retirement, short-term overall market fluctuations will decrease your 401k's value temporarily, but should be offset in the long term growth (see: assumption of indefinite overall growth)
A good part of most diversified 401ks assumes, as Ket mentioned, that markets grow over time.
This does seem to happen historically:
So long as your eggs aren't all in shitty baskets, even if one stock plummets you sell or wait and hope the average will continue growing. Mutual funds are professionally managed to remain sufficiently diversified and to ensure long-term, steady growth. Back when fiduciary meant something (midway through last year), those money managers that were fiduciaries were legally responsible to make solid, informed decisions with your wellbeing in mind. Now that protection is gone thanks to the Trump administration, but there are plenty of reputible managers who do that sort of thing.
All of this assumes sufficient diversity in their stocks and good management, though. Plenty of people retiring during boom times have shit in their portfolio because they invested poorly, or put everything in a single boom stock only to have it vaporize overnight (Dot Com Bubble).
So you put in 5% and your company matches (if they do) and so you get 10% of your income per year as 401k money.
That money will be put into funds you choose. Generally the younger you are the more aggressive you want to be.
I go through the funds and look at the fee loads of each fund and any one more than 1 percent I remove it from the list of funds to consider. This will get rid of half of them. Then I will see if I can get a grouping of fee loads less than .5% and in my case that brings the funds in my 401k down to 6. Of those I invest with my age and because I'm younger I put a higher percentage of money in riskier stock investments, and a lower percentage in bonds. There is a default investment if you haven't looked into your account, and the default is either one chosen by your companies benefits manager or equal shares in all of them.
The default investment is never the best.
Here are likely scenarios
We will use a conservative rate of return for an aggressive portfolio is 6% over the lifetime of your 401k.
Let's say you make 50k a year
So with yours and companies investment you are putting in 5k per year.
Worst case scenario
If you get 0 raises in the next 35 years at 6% you will have 535k for retirement with compounding interest.
Adjusted for inflation it works out to be about a quarter million dollars.
Likely reasonable scenario
If you average a 2% raise every year over 35 years at 6% you will have 733k for retirement which works out to be about 308k for retirement with inflation.
Good scenario
If you average a 3% raise every year over 35 years at 7% you will have 1 million for retirement which works out to be about 420k for retirement with inflation.
If you are young figure you will also receive about 78% of your Social Security contributions. Roughly $1400 in today's money.
Quick question: do you have money right now or expect to get some money in the near future that you need to invest?
"How should I invest my money?" is a slightly different question with different answers from "how does the stock market work?"
the "no true scotch man" fallacy.
Because the answer to how is always invest entirely in the Enc Family Muffin and Crumpet Delivery company. Imagine a fresh muffin, delivered directly to your workplace on demand!