Many people talk about “the Market”, but what does that mean? The financial market is made up of millions of participants just like you. Buyers and Sellers who volunteer to trade shares of companies all over the world.
In 2012, approximately 39 million trades took place every day in the world’s stock markets, equalling nearly US$200 billion dollars.
The collective knowledge of all those participants is powerful. For example, a group of people were given a jar full of jelly beans and asked to guess how many beans it contained. Some guesses were too low and some too high but the average guess of 2,716, was remarkably close to actual number of jelly beans – 2,650.
Together, we know more than we do alone.
The Stock Market could be described as a large information processing machine that takes in all available information about a company. All this information impacts the price of the stock.
No one can really know if that price is right but thanks to the markets’ processing power, we can treat the current price as the best estimate of its actual value. Stock prices are like other prices, they move up and down based on new information. Market participants quickly respond and prices adjust accordingly.
So you might think that to be able to get ahead, you need to predict where stock prices are going, right? Wrong, when driving, how many times have you manoeuvred to stay in the fastest lane of traffic, only to find yourself at another standstill? You add anxiety, risk getting into an accident and may or may not get ahead.
In the same way, trying to anticipate the movement of the financial markets adds anxiety and unnecessary risk. When you are trying to predict the market, you are competing against the collective knowledge of all those millions of buyers and sellers.
Instead, harness that collective knowledge for your portfolio and invest through a financial broker who will put the power of the markets to work for you.