eli5: How do stock traders know when to buy and sell, is it pure guessing or is there factors that affect it?
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It depends. There are a variety of different traders who trade for different reasons and with different resources available to them. Some will be very well connected and will often have insider information about things going on inside companies, governments, etc. that has not been made public yet. It’s generally illegal to trade on the basis of insider information, but this isn’t really enforced that well. Other traders have developed models that they think will enable them to predict things better than other traders, or have IT setups that they think will enable them to react to events more quickly.
There are also people who do arbitrage, in which they make a combination of trades at the same time that are almost guaranteed to make a profit (e.g. they might buy something on one market and sell something that’s essentially equivalent on a different market for a slightly higher price). This isn’t easy to do, but there are companies and traders who specialise in it. And there are businesses that use financial markets as part of a hedging strategy. For example, they might be worried about some particular eventuality (say, a rise in oil prices) that will harm their business, so they make investments that will be profitable in that circumstance (say, buying oil company shares).
And there are also plenty of people who have no idea what they are doing and essentially buy and sell things at random. Since they are competing against the people who do know what they are doing, they are likely to make a loss.
In very ELI5, Stock trading is betting on the price of commodities like gold or grain or shares of the profit of a company. Traders can bet on the price going up or going down.
This forms a very complex international market, with the predictions of future prices influencing the current prices!
Stock Traders skill is to predict the changes in the markets with the aid of **statitistics/math/AIs and of course “confidential information”** (think of a big company merger or massive firing of employees).
It’s not a coincidence that many big big traders serve on the boards of many companies.
To avoid conflicts of interest, a crime called “i**nsider trading**” prevent people working for a company to use inside information to gain financial gains. < LOL, this unfortunately isn not a joke and gets ignored by 99% of the times.
#ELI5
Your friend Carol has a lemonade stand. It’s doing pretty well.
You make a deal with Carol. You’ll give her $100, in exchange for a share in the profits. When her profits go up, she’ll give you a share of that.
If you wanted to, you could sell your share to Tim. Tim gives you $100, but now Tim gets a share of the profits, not you.
But you’re not sure if you should sell to Tim yet.
A week goes by, and Carol’s doing great with her lemonade stand. She sells out of product every afternoon. She raised prices, and still sells out every afternoon.
Should you sell to Tim? Or keep your stake, and keep collecting your share of the high profits?
What if Tim offers you $200 instead of just $100?
A month later, it gets colder outside, and nobody’s buying lemonade anymore. Carol’s sales are down, bigtime.
Should you sell to Tim? Or should you keep your stake, hoping sales will go back up. I mean, when sales are down, you’re not getting any share of profits, so your share is worthless to you, right?
Now Tim is only offering you $50, because your stake isn’t worth as much.
Should you sell?
The answer is really up to you, and how risky you like to be.
The answer also depends on how knowledgeable you are. Maybe you know a LOT about the lemonade business, and you know these poor sales will recover. Maybe you know something about Carol, and that she doesn’t follow through on things, or is a poor manager of money. Maybe you know that they’re building a new neighborhood and traffic will increase past the lemonade stand.
It all depends on you.
Badly. Index funds consistently outperform actively managed funds.
https://www.nytimes.com/2022/12/02/business/stock-market-index-funds.html
The actual answer to the question is that they research historical trends, company financials and other information and try to use that analysis to determine which stocks will perform better than the market as a whole. But it does come down to guesswork, because they are all part of the market as a whole. That’s not to say that some people don’t do really well sometimes, but the best strategy also happens to be the easiest.
Stocks rise on good news and fall on bad news. If you could get news earlier than everyone else, then you could buy before good news (that is, before prices rise) and sell before bad news (that is, before prices fall). Getting news early is the hard part.
Some ways to get news early:
* cheat: e.g., if your spouse works in the finance department of her company, and she knows that earnings will disappoint, then short her company (but actually don’t because you’ll get caught).
* fancy models: make a machine learning model to predict the direction of stock prices in the next 5 seconds and follow its suggestions
* react to news faster than everyone else: If, when you hear good news, you click “buy” before everyone else, you’ll make money. Of course, you need machines to digest news and click buy now.
* instinct: A few people, all billionaires, can sometimes predict what the market will do in the next few minutes, and they make a lot of money doing it
It’s a combination of:
* Pure guessing;
* Past experience;
* Data that you can extrapolate from;
* And pure guessing.
Sometimes it’s also getting insider information that isn’t public knowledge yet. This is illegal, but no one cares.
They look at:
Historical support and resistance
Volume
Is the stock trending up or down in the day to day and long term
Macro economic conditions
Company news
Mostly guessing. A lot will claim some plan or algorithm or insight. But for every buy there is a equal and opposite person deciding to sell. It’s a zero sum game.
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