G-KIRAN
Topic Author
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Joined: Fri Jun 02, 2000 1:55 am

How Does The Stockmarket Work?

Mon Jan 12, 2004 1:16 am

My parents have given me 1000 pounds between now and university. They suggest that I should either travel or invest it in shares. So how does one buy and sell shares on the market? I know absolutly squat about it. Any good websites out there?

Cheers
 
777236ER
Posts: 12213
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RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 1:19 am

I know absolutly squat about it.

Well then you shouldn't invest it in the stock market.

My parents have given me 1000 pounds between now and university.

Put it in a bank!! Believe you me, you'll need it at uni.
Your bone's got a little machine
 
BlatantEcho
Posts: 1820
Joined: Wed Sep 27, 2000 10:11 am

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 1:50 am

This is cut and paste from a little while ago. It desscribes the stock market, and some general investment theory.
-------------

You're young, probably don't have a family yet, may not be married or have a lot of obligations. You can afford more risk. Your earnings potential only grows as you age, money lost now is more easily recovered as you grow into the career of your choice.

It that sense, know that the stock market follows a "random walk" meaning, you might as well bet money on coin flipping, the charts end up looking remarkably similar.

That said, it is very hard to identify under or over valued stocks. The more sensible approach is to find a company with good leadership, strong growth possibilities, and a clear business plan. A company you find that meets some of those goals, MAY appreciate, and the stock price trend upward accordingly.

Find some things that interest you, and look into some companies that are part of that category. If it's airplanes, so be it. Look for one that you think can really grow, and grow smartly. Don't be wooed by fancy names and colorful lights, (proof = Southwest Airlines) look for sound business fundamentals with growth potential.

As much as any airline (in this case) can grow, it can also shrivel up and die. Do not grow attatched to a stock, and do not expect any returns above inflation. Pick the stock you like after researching it, and let it ride. Don't check the price everyday, trust the research you did and maybe in a year, you have a lot more money, but you can risk more now than you can when you have a wife and kids to feed.

George
They're not handing trophies out today
 
funflyer
Posts: 817
Joined: Sat Aug 09, 2003 4:53 am

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 3:18 am

You should invest in me!!!
I'll take you 1000.00 and I can (in 5 years give you back 2000.00)


 Smile Smile Smile
Who cares about status?
 
SlamClick
Posts: 9576
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RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 5:19 am

Take the deal FunFlyer offered. That is better than most people do in the stock market.

Better yet, don't ever take financial advice from an airline pilot. Especially me.
Happiness is not seeing another trite Ste. Maarten photo all week long.
 
Dash8King
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Joined: Wed Nov 21, 2001 8:45 am

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 5:49 am

Go to your stock broker and tell him you want to invest in ABC company. What you want to look at are the companies debts, P/E ratio, 52 week high and low, at least 2 years of Quarter results, how diluted the stock is, how diversified are they? Seeing your age bracket chances are your going to school soon, don't invest then because you should have your money in for the long-haul someone with very little knowledge should not attempt to be a day-trader. If you still want to invest then get Mutual Funds. You will not have to make any stock decisions your fund manager will.
 
BlatantEcho
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Joined: Wed Sep 27, 2000 10:11 am

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 6:31 am

I'll have to disagree completely with Dash8King.

You aren't going to learn how to manage money if you have some fund manager do it for you, and dropping $1000 into a mutal fund isn't going to have brokers crawling all over you to give you their latest tips.

Defintely invest now, when the heck else are you going to start? You got ~$1000, who cares if you loose it. Invest smart, learn, and grow your money if you can. Please see my post above if you are concerned about loosing money, that should be the last thing you are thinking about right now.

Research, reaserch, reaserch. You're young, live and learn. You'll pay enough in broker fees to trade your own stocks, don't pay a load fee for someone to do it for you.

George
They're not handing trophies out today
 
cfalk
Posts: 10221
Joined: Mon Dec 04, 2000 6:38 pm

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 6:39 am

Speaking as someone who has played the markets with some success (and failures) I would suggest the following:

1) Do not try to invest the money yourself - for several reasons. Firstly, no broker is going to want to deal with an account that small and owned by a minor. Secondly, you know little about choosing stocks, and you should get some practice before managing real money.

2) Try to find someone you can absolutely trust. Someone in the family who does some investing. A grandparent would fit the bill nicely. Ask if he would be willing to manage your money for you, grouping it with his own investments.

3) Simply putting it into a savings account won't bring you much - Interest rates are rock bottom at the moment. I'd go that route only if you can't find anyone in option 2).

4) While someone else deals with your real money, get a little experience on the side, with no risk, and see how well you can do. Try the Virtual Stock Exchange at http://game.marketwatch.com/Home/default.asp. You set yourself up with some virtual funds, and you can create a simulated portfolio that you can manage on a daily basis, buying and selling, stops and limits, etc. It's a lot of fun, and all the stock prices they use are real. It's a lot of fun, and it is a riskless way of getting some realistic training. It can even be quite addictive.

Good luck,

Charles
The only thing you should feel when shooting a terrorist: Recoil.
 
B2707SST
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RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 6:51 am

If you don't want to bother investing in specific companies, you can buy mutual funds with particular objectives (such as low risk capital preservation, high risk/return, technology, health care, bonds, etc.). There are also "index funds" that track the entire market - in the US, we have Spyder funds that mirror the performance of the entire S&P 500. These funds provide "instant diversification" against any particular company's problems. The FTSE or other European indices may have similar index funds.

As others have mentioned, picking specific companies is difficult, especially since brokers may not be particularly objective, and large investment banks spend so much time looking for bargains that deals are usually snapped up before individual investors become aware of them. If you choose to invest in particular companies, most investors recommend at least 30 different stocks in a variety of industries. This provides good diversification, which will shield you from any one company's ups and downs. A lot of people get hit when they invest a large portion of their assets in one or two companies (often their employer) and those stocks underperform the market.

I would recommend a fairly growth-oriented mix of stocks, since you will not need the funds for some time and should be willing to accept more risk than, say, someone 60 years old. In any case, the earlier you invest, the more time you allow compound interest to work on your money. Whatever you do, don't get into bonds. When interest rates begin to rise, as they will have to before too long, bond prices will fall. Stocks are a much better alternative right now.

--B2707SST
Keynes is dead and we are living in his long run.
 
luv2fly
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RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 6:57 am

Start by reading about investing, there are more choices than just the stock market to look at....
You can cut the irony with a knife
 
Dash8King
Posts: 2658
Joined: Wed Nov 21, 2001 8:45 am

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 7:08 am

If you are trying to increase it for extra cash for school, which I originally thought when reading that is why I recommended you not investing because you should be in it for the long-haul. However if this 1000 pounds has nothing to do with school then sure go ahead and invest. I still recommend Mutuals because with 1000 pounds it is a little hard to diversify unless you are going to play the penny stocks which can be tricky then Mutual funds are the way to go right now. By the way how much would 1000 pounds be in American or CDN? Also keep in mind you must purchase at least 100 shares in a company.
 
Marcus1111
Posts: 3
Joined: Thu Jan 08, 2004 8:52 pm

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 7:35 am

If you are gonna need the money anytime soon don't invest in shares at the moment. The stock markets ( mostly all Europeans ) have been gaining up tp 70% since march 2003. The chance is there that there will be a consolidation soon. If you invest now and this happens you might be forced to sell your shares with loss.

You should wait for the next consolidation, which I believe will happen soon, and then buy shares of big international companies like banks, etc. This way it's possible to gain 10-20% until the end of 2004 at relatively low risk. Just make sure to set stop loss orders ( The price at which the shares are sold automatically if they fall below it, usually 5% below your buy price ) to prevent losing too much money if something really goes wrong like a terrorist attack.

Just remember you should never invest money in shares or bonds or whatever, that you already have planned on spending in different things.
 
bobrayner
Posts: 2038
Joined: Sun Apr 27, 2003 8:03 am

RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 8:20 am

Try the Virtual Stock Exchange at http://game.marketwatch.com/Home/default.asp. You set yourself up with some virtual funds, and you can create a simulated portfolio that you can manage on a daily basis, buying and selling, stops and limits, etc. It's a lot of fun, and all the stock prices they use are real. It's a lot of fun, and it is a riskless way of getting some realistic training. It can even be quite addictive.

In a similar vein, I can recommend this: http://fxgame.oanda.com/
It's a currency trading sim. Once you're hooked on that, oanda would like you to trade real currencies with them.  Big grin
Cunning linguist
 
aloges
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RE: How Does The Stockmarket Work?

Mon Jan 12, 2004 8:23 am

"How Does The Stockmarket Work?"

Not at all. Never.

Signed,
all bears on this planet
Don't cry because it's over, smile because it happened.
 
ryanb741
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Joined: Thu Mar 28, 2002 6:36 pm

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 2:58 am

Stick it in a high interest bank account like an ISA. It is a safer bet. Depends if you can afford to lose the £1000 or not, but £1000 isn't going to get you far travel-wise and like 777236ER said you will need it for university.
I used to think the brain is the most fascinating part of my body. But, hey, who is telling me that?
 
mirrodie
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Joined: Wed Apr 19, 2000 3:33 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 3:02 am

How does the stock market work?

I'm surprised no one said it yet..

works by fear and greed.
Forum moderator 2001-2010; He's a pedantic, pontificating, pretentious bastard, a belligerent old fart, a worthless st
 
Qb001
Posts: 1923
Joined: Fri Apr 28, 2000 12:42 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 3:51 am

To answer the question directly: the stock market does not work.

A good friend of mine who is a top accountant for a huge company keeps saying this about the stock market: it's easy to make 1M$ in the stock market, as long as you're ready to lose 2M$...

Numerous studies have shown that a chimpanzee will beat a so-called top stock market analyst 50% of the time "playing" the stock market.

I invested 2K$ in a stock market mutual fund back in 1999. I have underhand my latest report; it's now worth 1,717.10$.

Had I wisely placed that money in a bond, it would now be worth around 2,300$ instead.
Never let the facts get in the way of a good theory.
 
cfalk
Posts: 10221
Joined: Mon Dec 04, 2000 6:38 pm

RE: A Note To "Conservative" Members

Tue Jan 13, 2004 4:30 am

To answer the question directly: the stock market does not work.

That is utter crap. The stock market is a wonderful thing that absolutely works. Look at the list of economies that have functioning stock markets. Now look at the countries that don't. Any questions?

The key of course is to have rules in place that allow a good amount of information to be available to the investor. This is why the Enron / Worldcom and other scandals were so important. But these are constant learning experiences.

A Barron's ad from 15-20 years ago said it best: "Every time you buy a stock convinced that it will appreciate in value, remember that you are buying it from someone who is equally convinced that it will decline in value."

If you stay away from mutual funds, educate yourself, and NEVER let yourself follow the herd, you can make money even in a bear market. I doubled my investments since early-2001.

Charles
The only thing you should feel when shooting a terrorist: Recoil.
 
Qb001
Posts: 1923
Joined: Fri Apr 28, 2000 12:42 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 4:48 am

It's amusing how people only quote what they feel comfortable arguing with. Interesting to see Cfalk avoiding to argue about the fact that chimps will beat the "best" stock market analysts 50% of the time...

If you believe in the validity of an activity where chimps are better 50% of the time, then all the best to you. To me, it's a sign that there is something sick with the way the stock market works.
Never let the facts get in the way of a good theory.
 
cfalk
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Joined: Mon Dec 04, 2000 6:38 pm

RE: A Note To "Conservative" Members

Tue Jan 13, 2004 7:13 am

Interesting to see Cfalk avoiding to argue about the fact that chimps will beat the "best" stock market analysts 50% of the time..

Remember that a full 50% of the population is dumber than average  Smile/happy/getting dizzy (well, make that 49.9999999%)

Having been an active investor for a number of years, it does not surprise me that a lot of these analysts don't have a clue about what makes a stock good or bad. Part of it is a forest-and-trees problem, where they percieve only a select few indicators that they tend to prefer, and forget about the rest. Part of it is also a herd mentality. Another is the short-term focus most of them have. The list goes on. I never read analysts' reports. NEVER. I don't trust them at all.

I can't answer for the chimps. But in reviewing my portfolio over the past 3 years, I own or have owned at some point during that time stocks in 116 different companies, and I lost money on 16 of them - and most of them I still own, in the belief that they are recoverable. The habit of selling a falling stock when the price is already lower than what you paid is silly, unless you think the company is irretrievable (which is rare). You might have to wait a while, but they nearly always come back. That's another thing I think the "experts" screw up on.

Charles
The only thing you should feel when shooting a terrorist: Recoil.
 
Qb001
Posts: 1923
Joined: Fri Apr 28, 2000 12:42 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 9:30 am

No, you don't understand.

In a competition between an analyst and a chimp, having multiple rounds, sometimes the analyst wins, sometimes he loses. And all analysts that took part in that "competition" did lose at least once against a chimp.

You can replace the chimps by darts that you randomly throw on a wall full of stock names and you'll get the same results.

The stock market is chaotic and unpredictable. In other words, it pretty much works like a casino.

Over time, say 15-20 years, a conservative investor can hope to make 3% with the stock market (after inflation), which is not much better than what you can get with government bonds.
Never let the facts get in the way of a good theory.
 
vaporlock
Posts: 3528
Joined: Sat May 19, 2001 9:22 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 9:30 am

I have done some research and read quite a bit about the stock market.........but believe me I'm no pro.

I myself have a good investor....as a matter of fact I was checking my stocks today....I haven't bothered since June 2003. My investment has gone up 7k.....thats better than nothing..........but I realize it can go down just as fast as it went up!

Good Luck with whatever you decide!

Phyllis Smile/happy/getting dizzy

 
B2707SST
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RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 10:20 am

Actually, the long-term historical return on the stock market over the past hundred years adjusted for inflation is about 12%, versus 6% for bonds. I can find a citation for that, but I'll have to dig around in my finance books.

On a day-to-day basis, the movement of the stock market is basically random, so active trading is likely to lose money once fees are taken into account. But a well-diversified portfolio held for the long haul should appreciate nicely. Also, too many people give into the horde mentality and buy high, sell low. As Joseph Kennedy said before the 1929 crash, "only a fool holds out for the top dollar."

--B2707SST
Keynes is dead and we are living in his long run.
 
Qb001
Posts: 1923
Joined: Fri Apr 28, 2000 12:42 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 11:02 am

From a paper written by economists associated with a little known university called Harvard.

The average annualized real stock return over the best decade between 1802 and 1997 was 17%, while the average return over the worst decade was –4% for a range of 21%. The decadal ranges for bonds and bills are 18% and 17%, respectively. Over 20-year periods the ranges for all three assets are almost identical at 12%, and over 30-year periods the range is actually smaller for stocks at 8% than it is for bonds and bills at 9%.

It's here.
Never let the facts get in the way of a good theory.
 
B2707SST
Posts: 1258
Joined: Wed Apr 23, 2003 5:25 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 12:44 pm

That's an interesting paper that I haven't run across before, but the numbers cited in that paragraph are not annualized returns - they're the range in returns between the best and worst-performing periods.

For stocks, as noted, the spread between the best decade (17%) and worst decade (-4%) is 21%. One would expect the spreads for bonds and bills to be lower, and they are, at 18% and 17%.

But what the authors are pointing out is that over 20-year and 30-year periods, a portfolio of stocks is less risky than a portfolio of bonds or bills, because the multi-decade return range for stocks actually falls below the range for bonds and bills.

Thus, over a 30-year time horizon, the best and worst period returns are only 8% apart for stocks, compared to 9% for portfolios of bonds and bills. Stocks are now less risky than bonds and bills. This section of the paper is an endorsement of stock portfolios, because their riskiness drops much more than debt securities as one's time horizon widens.

Nowhere do the authors give the actual average returns of stocks and debt instruments over annual, 10, 20, or 30 year periods. I could find it easily with the statistical software we use at work, but I won't have access to Pertrac for some time.... I'll try to look it up, though.

But I would agree that actively managed funds are risky propositions. Every year, The Wall Street Journal picks a stock portfolio by throwing darts at stock pages; their random portfolios outperform 39% of actively managed funds. There's a more thorough explanation here.

They attribute this conclusion to the "random walk" theory, which means that the market is inherently unpredictable over short periods, so active management is no more likely to generate good returns than picking any given portfolio (and considering trading and management fees, will likely underperform a "passive" portfolio).

The implication of this finding isn't to avoid the stock market. It's to invest for the long term in a well-diversified portfolio or in index funds that track an entire market. Mutual funds, day trading, and other active management techniques may well produce lower returns and cost you more than buying a Spyder and sitting on it. This doesn't mean that there aren't good money managers who can consistently outperform the market; I work for a company that, since 1984, has beaten the S&P's return with half its level of volatility. You just have to look hard for the consistent winners and keep close track of what they're doing.

--B2707SST

[Edited 2004-01-13 04:50:04]
Keynes is dead and we are living in his long run.
 
Dash8King
Posts: 2658
Joined: Wed Nov 21, 2001 8:45 am

RE: How Does The Stockmarket Work?

Tue Jan 13, 2004 3:34 pm

I think some people might be giving some people the wrong idea that they can close their eyes, and point there finger on a stock and it will win them big money. I am talking about the reference to the monkey and the darts. If you knows nothing about the markets, get mutuals, try to learn and then run your own portfolio on the side. Also you must keep in mind that you only have 1000 and you can not buy a whole lot companies with that much, thus decreasing your odds of good performance. A book that I read in Grade 7 is informed a lot of my knowledge. I only paper trade because I don't have much money. However in paper money I am up from 10,000 to 51,534 in a year. I have 16 companies, and have either picked winners or duds, but not really any losers yet.
 
Qb001
Posts: 1923
Joined: Fri Apr 28, 2000 12:42 am

RE: How Does The Stockmarket Work?

Wed Jan 14, 2004 3:55 am

I think some people might be giving some people the wrong idea that they can close their eyes, and point there finger on a stock and it will win them big money. I am talking about the reference to the monkey and the darts.

That's not exactly what I meant. What I meant is that you can build your stock portfolio by throwing darts on the wall and that portfolio will beat the best analysts portfolio 50% of the time.
Never let the facts get in the way of a good theory.

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