What a market is and why it exists
From scratch: who sells to whom and why. Supply, demand, price — and why markets are permanently on edge.
A market is not "something on a trader's screen". A market starts wherever one person wants to sell something and another wants to buy it. That's it. An exchange is just their big automated courtyard.
Supply, demand, price
Price is a compromise between a seller wanting more and a buyer wanting to pay less. When there are far more buyers — price goes up. More sellers — it falls. Everything else is just narratives layered on top.
Term
Demand
How many people, with how much money, want to buy an asset right now.
Term
Supply
How many people are ready to sell that same asset and at what price.
Why do we even need a market
- So businesses can raise capital and grow.
- So people have a way to preserve and grow their money.
- So price honestly reflects the expectations of thousands of people at once.
«In the short run the market is a voting machine; in the long run it is a weighing machine.»
— Benjamin Graham
Key idea
Price isn't the truth about a company or an asset. It's a snapshot of crowd expectations. That's why markets constantly "lose their mind" — they are the crowd.
Nice. One lesson closer to understanding why the market keeps losing its mind.