How Does Stock Market Really Really Work???

[a fictional story]

Once upon a time there was a generous kind old man named Lolo living in the mountain of Alps.

He’s with his four grandchildren - Lulu, Mimi, Pepe and Wawa.

Lolo loves telling stories very much ever since, but one day, for a change, he decided   to share to his grandchildren the story of Warren Buffet, the guy who made the greatest wealth in the history of stock investing. Everyone was amazed in what the stock market could do after hearing the story, except for Wawa.

Fortunately, these children had been holding 10 peysows inheritance each left by their parents.

So the next day, Lulu, Mimi and Pepe went down the mountain to apply for an online stockbroker account. Wawa, who realized there were no other kids in the mountain to play with, also went down with the three. They all waved their hands as they bid goodbye to  Lolo.

Very timely, a  strong company OMG had placed an IPO – Initial Public Offering, which only means the management was taking their company public, to gather funds for expansion and development. They were offering 5 outstanding shares.

Lulu, Mimi and Popo eyed to buy OMG which was priced 5 peysows per share.  Wawa, on the other hand, still doubtful, decided to put his whole money in the bank.

	Cash	#shares
OMG	0	5
Lulu	10	0
Mimi	10	0
Popo	10	0
Total	30	0

Lulu, the oldest and bravest of them all, and Popo, the greatest fan of Lulu, immediately bought 1 share each of company OMG.

Effectively, this was what happened.

	Cash	#shares
OMG	0 + (5*2)  = 10	5 – 1 – 1  = 3
Lulu	10 – (5*1) = 5	0 +1 = 1
Mimi	10	0
Popo	10 – (5*1) =5	0 + 1 = 1
Total	30	5

OMG now had money for their future plans.

A week has passed, during which they enjoyed playing patintero, with Toto, their newly found  friend, as their constant batotot.

Then the good news came.

OMG, after using the gathered funds efficiently and declaring the higher than expected increase in earnings, caught the attention of the trading public, which made its price jumped to 8 peysows per share.

Lulu, decided immediately to sell his share at the present price of 8 peysows per share, but Popo, who followed her instinct that time, hold on to his sole share and resisted to sell.

Mimi, who saw what happened to his two friends, decided to enter at this point, and bought the share sold by Lulu.

	Cash	#shares
OMG	10	3
Lulu	5 + (8*1) = 13	1 – 1 = 0
Mimi	10 – (8*1) = 2	0+1 = 1
Popo	5	1
Total	30	5

Too bad for Mimi, the excitement in OMG slowly faded, which pulled the price down and consolidated it at 7 peysows per share.  Afraid of more future decrease in gain, Popo sold his share bought back my OMG, while Mimi hold on to it, crossing his fingers and toes, hoping it would bounce up again.

	Cash	#shares
OMG	10 – (7*1) = 3	3+1 = 4
Lulu	13	0
Mimi	2	1
Popo	5 + (7*1) = 12	1- 1 = 0
Total	30	5

So what effectively happened?

Lulu had a gain of 3 peysows, Popo had 2 peysows. Mimi was the only one left with OMG share. She could either gain from it or lose from it, but she was now more confident of the company’s potential.

And what was waiting for Wawa?

Well, she said she’s willing to wait a year long to have a tenth (0.1) of a peysow  as interest  (11 months to go for him!).

Thank God, Lulu and Mimi were great givers; they shared their gains to treat Mimi, Wawa Lolo and Toto.

They realized that while stock market could go up and down, their friendship must be steady going and would always be a better investment than all other kinds present in the capital market.Ultimately they decided to join forces and build a new company where other people could invest.

And they lived financially free ever after.

Whaha.  Sorry for the poor plot. That’s all I could write years after not practicing my Malikhaing Pagsulat  (MPs10) learnings  (hellow Sir Rene Villanueva, may you find rest in peace now...)

Financial Morals

But anyway, let me reveal some financial lessons from the above story.

• First, that no money is lost in the market. Throughout the process, the total cash remained at 30 peysows. That only means when one loses money in the market, someone wiser enough is gaining and smiling from ear to ear.  (In my illustration, total shares also remained constant, but as you’d know soon, this can be increased by additional stocks offering in the future.)
• Second, that the stock market is indeed very dynamic – defining what ups and downs really mean. Rewards and risks are long-time best friends. It’s like a stick; you simply can’t have one end without the other.  And with proper knowledge, guidance and experience, one knows how to minimize the risk involved, and increase the rewards simultaneously. The risk always remains.
• Third, it’s not wise to put all your money in the bank, especially those you plan to save for your long-term aspirations. Aside from the fact that it doesn’t really work much for you, you essentially waste the opportunity offered by this great vehicle for your wealth building.

• Fourth, that one should seek company earnings and potential as basic guide in investing. And basic means essential. You invest in something because you believe it would do well to give you good returns. In fact, long-term investing becomes most efficient (or least risky) when buying stocks of companies with solid and consistent earnings. Most lose money because they trade and speculate instead of investing; trying their luck in every stock hot tips they hear from rumors. (You can read this blog on how to find the money in the Philippine stock market.)

• And lastly, that just like ordinary markets, stock market is also governed by the Law of Supply and Demand.  That’s a law you can never change and could work for you or against you. When more people are selling rather than buying a stock, its price declines. The inverse is also true.

So there you go.

That's  a very very general and rough picture of how the stock market really really works.

It's now up to you if and how you will work on that to your advantage.

The market is weird. Every time one guy sells, another one buys, and they both think they're smart

Good luck my friend!

Treat me a megacold avocado shake in an ultrahot summer after your first million  thousand! Hehe.

Have mesospheric high fun!!! 

Have fun investing! 

Omeng 

PS: For beginners, download your free copy of Bo Sanchez' My Maid Invests in the Stock Market... And Why You Should Too [PDF]. Click here to download!  

If you're just starting to invest, download this FREE practical ebook to guide you in every step of the way - Investing in Philippines Stock Market for Beginners!