The Excitement | How The Market Manages Itself

The market. The market. The market.

Excitement sears through me whenever I think about large groups of people all gathered together to trade. Back in the day, people travelled far and wide to gather at physical locations. But these days, people can just gather together on the internet. It doesn’t matter where this crowd is gathering… Only that it does. And wherever crowds gather to buy and sell… is exactly where I want to be.

The market is where companies, commodities as well as goods and services are sold. There’s wholesale and retail. In the case of the stock market, it is where tiny bits and pieces or perhaps even large chunks of companies whose values rise and fall… are both bought and sold.

Whatever anyone is buying or selling; the market is the place where buyers and sellers come together… for the sole purpose of exchange.

How do these folks make money?

The spread. The spread. The spread.

And what is the spread? The difference between the buying and selling price. The meaning of ‘spread’ is far more subtle and intricate than ‘buy low, sell high’. It is the difference between the ‘bid’ and ‘ask’ spread. The ‘bid’ is the top price a buyer is willing to pay. The ‘ask’ price is the top price a seller hopes for. Between these two numbers, a number is fixed…

The person who fixes these two numbers is the broker, the middleman, the negotiator. They make their living from the spread–the difference between the bid and the ask. However, the spread is not always pure profit. It can contain a number of fees or costs that can eat into the profit margin.

The middleman’s role is not as outdated as we would like to believe. The main reason: the spread is almost always fluctuating as traders and investors respond to new information. Low volume stocks, on average, have a wider spread because they may not be bought and sold very often. If you’re a day trader, the bid and ask spread is critical because the difference can have a big impact on your daily profits. If, on the other hand, you’re a market maker; it is the volume of the trade and not the individual trade that defines the profitability of your transaction.

The spread itself is affected by many factors: availability, volume, popularity and volatility. Long gone are the days that traders solely made deals at coffee shops or at brick-and-mortar exchanges. In 1986, the London Stock Exchange underwent a major transformation when share trading went electronic for the first time. While this made commissions smaller, it also made trading far more efficient.

One of the keys to successful trading is patience. You don’t necessarily have to trade everyday, even if you are a day trader. It’s important to watch and observe–to see what is going on both on the ground and in the air. If you don’t see any opportunities that meet your criteria, simply hang low till a valuable opportunity surfaces or presents itself. Don’t allow yourself to get carried away by impatience or the inertia to just do something.

To plan effectively, we need to fully understand the risks that we are taking on. Some of these risks can be planned for, while others will arrive at our doorstep like a stranger in the night. The former can be factored into our risk portfolio, while the latter requires us to remain adaptable to unforeseeable circumstances.

In trading, as in life, there are a plethora of options available to you… As long as you have something you’d like to exchange. But if you show up empty-handed, you can only expect to leave the same way.