MODULE 5: Understanding The Markets

The rich understand how the markets work, and use that knowledge to their advantage.

How Do The Markets Work?

All markets work in different technical ways, whether we are talking about the stock market, bond market, real estate market, or the precious metals market.   

But at their essence, markets are a reflection of all the social, political, economic, and business events and changes that make up our world.

Changes in business conditions, government policies, interest rate direction, inflation, new technologies, and more all shape markets.

These complex and powerful forces influence how consumers and businesses perceive events and how they react to them by buying or selling.

When everyone is optimistic towards the stock market, they are bullish and are buying stocks.  When everyone is pessimistic about buying homes, prices decline and we have a bear market (declining prices) in real estate.

The rich understand how the markets work, and use that knowledge to their advantage.

Let’s now explore some secrets to understanding how the markets work.

Stocks Are A Discounting Mechanism

Professional investors have found that the stock market is a highly accurate forecasting device for determining changes in our economy and in business.  This is very powerful for investors as it helps them determine what to invest in and when to invest, minimizing risk of loss.

In the short-term, the stock market acts as a powerful discounting mechanism, which means that it discounts all the news and information available about stocks, the economy, interest rate direction, and business in general, usually 6-9 months ahead.

The stock market represents the full collective knowledge and consideration on the part of millions of well-informed investors, analysts, and financial professionals.  Each day, these market players ascertain and evaluate company’s prospects and earnings, as well as economic changes, the business climate, corporate earnings, earnings trends, inflation, interest rates, and more.

The fascinating thing is that everything known about a stock – its likely future, how its industry group is faring, how the economy will affect the company’s prospects, and more – all of this is already factored into the stock’s price at any given moment in time.

The constant stream of news, events, policy changes, etc. are dissected and analyzed in real-time, and the consensus is reflected in stock prices.  New information soon becomes old news, and while it may affect the market for a day or so, it quickly gets discounted and priced in.

This means that the stock market, comprised of millions of people interpreting the daily flow of news, events, economic changes, and business developments, becomes a sort of fortune-teller, and a very accurate one at that.

As mentioned earlier, it discounts all widely known information as much as 6 months to 9 months ahead.

Markets Anticipate Changes

The stock market frequently turns down well before the economy worsens, and starts on a new bull market when the economic news is terrible and people are pessimistic on the economy.

Markets correctly anticipate moves in the economy here in the U.S. as well as the world before they happen, and understanding this is key to becoming a successful investor.

For example, the stock market may start bidding up the price of a stock based on expectations of rising earnings, increased dividends, or growing market share. This may happen well before any actual increase in earnings or a growing market share.

Likewise, a stock may plunge 90% if the market has expectations of the company going bankrupt or having some severe problems.  This frequently starts to happen well before the company actually announces any problems.

The better investor you become, the more aware you are of the market’s forecasting abilities, and the less likely you will be hit by “unforeseen” circumstances in the market.

The next step is to understand market cycles.


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