Stock market basics

My friends no loner allow me to listen to or watch business news in their presence. They hate my outbursts at the business journalists’ attempts to assign explanations to the day’s market price action. Journalists always feel the need to assign motive to the price action due to a news event- after all, a good journalist knows how to make the news relevant.
But that’s not the way the market works. It doesn’t always wait for a news item to occur before making a move. After all, any market is just a collection of human participants discovering price, and the stock market is no different. I have observed most people I speak with outside the financial community have a misconceived notion about how a market participant forms the rational for making a financial decision. Most people that ask me for an explanation of the day’s large market movement, ask me what was the reason the market was up. They are disappointed when I tell them the large gain was not due to a brand new, sexy news item- a previously unknown factor whose emergence brings a paradigm shift in the way traders view the prospects for the future. They are disappointed to learn that the move was merely the result of the function of supply and demand for stock. The supply of stock available and the demand for that stock can fluctuate even if there is no new information: just like a fruit stand, the price of the farmers apples aren’t required to fluctuate solely on news of the amount of apples to be harvested that season. Rather, in reality, apple prices also fluctuate based on the number of people at the market at a particular time of day, or week.

This is what is called the mechanics of the market- we will break down the individual components of mechanics in separate posts.