9. What is the Stock Market Video Lecture | Become an Expert: Value Investing - Business Basics

welcome to course one unit three lesson
one what is the stock market in this
lesson we have four lesson objectives
the first is what is the stock market
the second is how does the stock market
work the third is what is a limit in
stop order and the fourth is
understanding Benjamin Graham's mr.
market so let's get started
okay so you might be wondering why we're
starting off so basic with what is a
stock market since a lot of people
understand that but what I like the
stress is that before we can master
something we have to first start with
the fundamentals so let's go ahead and
start off with our fundamentals and
really just kind of put this out here
and I think you're going to see how fast
things compound as we start talking
about more advanced things after we
first understand what the stock market
is so on the Left I have a picture of a
little boy and is his mother buying some
fruit at a local market and on the right
I have an old-time photo of the stock
market in New York Stock Exchange and
you can see on the left this is a market
where people trade money for food and on
the right this is a market where people
trade money for a proportional ownership
of a real company or a stock so let's go
to the boy and his mother picking the
fruit in this scenario let's say that
this little boy is going to go up and
he's going to buy this peach from a
vendor as he walks up he asks the vendor
how much is the peach for one peach and
the vendor replies let's just say $1 and
so at that point if the little boy
decides to buy the peach for $1 the
market price for that peach was
determined by who was it determined by
the vendor selling the pitcher was it
determined by the boy and to answer that
question it was actually determined by
both of them because the little boy had
to agree to the price that the vendor
was asking and so when you understand
that that the value of something is only
what people are willing to buy and sell
it and meet in the middle you can start
understanding how markets really work
and so how would the price of that peach
change if we changed the sellers let's
say we had more sellers let's say that
we had five different peach vendors all
lined up next to each other and we still
had the same number of consumers which
would be the little boy and his mother
here
and each vendor wanted to sell their
peach well the more vendors that we have
all selling the same product the little
boy now has the option to say well you
wanted one dollar but the person over
here only wanted 90 cents so can you
beat their price and so then what you
get is you get competition amongst the
sellers or the vendors and the little
boy is the person who's really kind of
controlling the price as the buyer now
if we take that scenario we'd flip it on
its head and let's assume that there's
only one peach vendor one peach seller
and there's a hundred little boys all
wanting to buy a peach that vendor the
seller now has the ability to control
the price of that peach and this is what
we call a buyers market versus a
seller's market and so when we look at
the stock market we have the exact same
thing happening as that scenario that I
just described you have buyers and
sellers when the sellers outnumber the
buyers that's called a buyers market and
when you have the sellers are less than
the buyers that's called a seller's
market and the reason it's considered
debt is because in that last scenario
where there's less sellers than buyers
the sellers are changing that value of
the company the value of the shares and
that's something that you just really
got to understand because it's really
fundamental to how the markets move so
let's take this with one share and one
seller to break this down and you can
see how the stock markets really working
and how eventually that market price
that you see when you go look up a
company and it says the market price is
$65 this is what's happening this is
what's determining that market price so
let's start off with a seller her name's
Amy and she has one share of J and J
which is Johnson and Johnson and she
wants to sell her share for $65 okay so
what she's gonna do and she has the
option to she's going to work with a
broker and you can see that I have the
bank there as the broker but this could
be Scottrade this could be etrade any of
those brokers could broker this deal for
her and what that really means is that
the broker is going to link up a seller
and a buyer and they're gonna exchange
their asset so when Amy does this and
she's going to sell her one share she
the ability to put it on the market for
one day for her $65 that she wants where
she could set it up for a 30 day trade
meaning that she has 30 days to find
somebody that that will buy her share
for $65 now
the first type of order that we're going
to talk about is what's called a stop
order and this is when somebody is
willing to buy for $65 then the trade
would be executed so she says broker
you're not allowed to trade my one share
unless somebody out there is willing to
buy it for $65
whenever Amy let's let's assume for just
one second that Amy had a hundred shares
okay she wanted to sell all hundred
shares and she put in a stop order at
$65 meaning some buyer has to at least
be willing to buy the first year for $65
whenever that happens let's say that the
first buyer only one to buy 10 shares at
$65 and then the next buyer when to buy
the remaining 90 shares but they were
only willing to buy it for $64.90
Amy's shares would all be executed under
that stop order and that's the thing you
got to really understand about a stop
order is even though she has it set for
65 if not all the shares are executed in
that first order the second order
whatever the price it could be higher or
lower is going to be executed because
it's all done at once so that's the one
thing you got to be aware of with the
stop orders even though it's at 65 if
not all the shares are executed at that
price some of them could go lower or
higher so let's go to the next thing
here so we know that Amy's wanting to
sell her one share for $65 now we have a
buyer we have a guy named Trevor and he
he wants to buy a share of Johnson &
Johnson and so he puts in a stop order
for $64 okay Amy's trying to sell her
one share for 65 because she wants to
make more money on it but Trevor doesn't
necessarily want to buy one share for
that high of a price and he's putting in
a stop order for $64 okay so let's see
what happens so as you can see here the
arrow pointing to where Amy's willing to
sell her shares 65 and Trevor's only
willing to buy it for 64 so we have a
discrepancy here and if we assume that
every single seller on the market would
want to sell their shares 465 and every
single buyer would only be willing to
buy it for 64 you would see no trades
happen on this particular stock so the
thing you got to understand is for every
transaction every single transaction the
buyer and the seller both have to agree
on what the price is going to be in
order for that trade to occur and for
that market price to even show up so
let's assume that a me and Trevor keep
stick to their to their stop order and
she keeps hers at 65 he keeps us as at
64 and then all of a sudden we have this
person enter and Kurt okay and Kurt owns
one share of Johnson & Johnson and he's
listed over there on the seller side
with AMI and instead of putting in a
stop order he puts in what's called a
market order and what that means is
Kurt's basically saying hey any buyer
out there that's willing to buy my one
share of Johnson & Johnson whatever
you're willing to buy it for I'll sell
it to you that's what that means when he
puts in a market order okay and since
Kurt does that Kurt comes into this
equation the trade is executed between
Kurt and Trevor for $64 and now
meanwhile Amy's still sitting there at
$65 wanting to sell her share for $65
and so that buyer that was out there was
met up with Kirk because Kirk didn't
care what what price he could sell it
for you just said also for anybody out
there that's willing to buy and Trevor
happen to be that person so the market
price now if we were gonna go pull up
Johnson & Johnson and this was the only
trade that happened for the day the
market price would now be displayed as
64 dollars a share now let's look at
this from the opposite perspective let's
say that amy is the only seller out
there and she's offering to sell her one
share and Trevor's a buyer and now we
have Linda who's a buyer okay Trevor has
the stop order in for sixty four dollars
was just not the price that Amy's
willing to sell the share for but now
Linda comes along she puts in a market
order so Linda's like I don't care what
price I can buy this at whatever seller
is willing to sell it to me for that's
what L that's what I'll buy it for and
so Linda then executes the share
at $65 and now the market price moves to
$65 and both of these both of these
sellers have now executed their shares
Kurt sold his to Trevor and now ami sold
hers the Lynda during that cycle right
there where we saw two shares traded we
saw the market price go from $64 to $65
okay does this mean that the company is
worth 65 dollars a share or did a couple
of people trade it for $65 and that was
nothing more than the trading price and
you know a person like myself and a lot
of other value investors would obviously
argue the second one is that that was
just a price that a couple people
established but when you look at the
grand scheme of things and how many
owners are out there that aren't trading
their shares you'd have to come to the
conclusion that they disagree with that
market price or they'd be selling their
shares or buying their shares so the
thing that really takeaway is we look at
this scenario is just because
something's training for $65 a share by
a couple people doesn't necessarily mean
that the company is actually worth sixty
five dollars a share and that's what
value vesting is all about is actually
determining what is that share worth and
then looking at what people are willing
to sell it for to buy it for and
capitalizing on that so let me show you
what a limit order is so what we just
talked about was a stop order now a
limit order is that let's go back to Amy
and she wants to still sell her let's
start over again and he wants to sell
her share for $65 or better so if the
price is $65 she's gonna sell if the
price is sixty five dollars and ten
cents she wants to sell it so as long as
that price is higher than the $65 Amy
wants to sell her share now we have
Trevor who wants to buy one share and he
puts in a limit order for $64 meaning if
he's gonna buy it it has to be under $64
he's not paying a penny more than $64
whenever he buys one share of johnson
and johnson so now as we look at this
chart it's not just pinpointed on the 65
and 64 you can see for Amy it's 65 or
greater and for Trevor it's 64 or less
so in this scenario if these were if
this was the only seller and the only
buyer that one share you would see no
tre
executed because there's a discrepancy
and they can't agree on the price so
here we go once again Kurt enters and he
puts in a market order and so because
Kurt's willing to sell his share for
pretty much anything that whatever the
buyer offers is what Kurt will sell it
for
we got the market price is now displayed
as $64 so here's what I want you to
really understand for every single trade
that happens there's always a seller and
there's always a buyer so if you're
buying shares from somebody somebody's
wanting to sell those to you and their
reason for selling them might be Amy's
reason for selling so for Amy she said
this stock stinks I can't make any money
off of it so I'm going to sell it and so
whenever she sold that share over to
Linda if you remember in the first
scenario Linda was buying it because
this company's going to make a lot of
money so here you have two people that
traded an asset traded that share one of
them thinks that it's it's a piece of
junk and the other person thinks that
it's a great company it's going to make
a lot of money and then as you looked at
Kurt he was selling it because he needed
money so he he might have stuff still
felt like the company was a good company
but he sold it because he needed the
money and then Trevor he's buying
because he thinks it's going to make
money so the thing you got to look at
when you look at the sellers perspective
it could be really Teufel the person
could be selling because they think it's
a horrible asset or they could be
selling because they just need they just
generally need money on the buyer side
of the house people were only buying
shares because they think it's good
company it's going to make more money
for them so as we look at that's that
scenario bit on it on a grand scale
hundreds of thousands of people doing
that free for any stock you can see how
that market price is moving up and down
because it's not the majority of people
that are determining that market price
it's just a few people that are
determining that market price and so
what you see is it's going up and down
because people don't want to sell their
shares for any less than what they could
make off of it and people don't want to
buy their shares for any more than what
they have to pay for it and so what you
find is that the market moves in these
cycles and so this was Benjamin Graham's
big thing and
if you don't know who Benjamin Graham is
this was Warren Buffett's professor at
Columbia and he attributes almost all of
his investing knowledge to Benjamin
Graham and his principles and one of the
things that Benjamin Graham taught in
his class at Columbia was this idea of
mr. market and so he described mr.
market as his emotionally disturbed
business partner and you can't change
mr. markets behavior all you can do is
react to it and so the saying goes mr.
market is your servant not your guide so
the way the Benjamin Graham would
describe this in his class is he say you
know mr. market might come out and say
hey guys hey everyone come here buy
stocks and you can make a lot of money
you can do great today and he creates
this all this hoopla in motion behind
the market he's telling everybody all
not only am i making tons of money but
my neighbors making tons of money and
then mr. market can also be the guy
who's just got a horrible attitude on
the direction things are going what shot
I'll take all your money and the outlook
for tomorrow is even worse than today so
don't even ask and if you really think
you're going to make money in the stock
market you're just kidding yourself and
so these were the personalities that mr.
market had and what Benjamin Graham
wanted his students to really understand
was you never follow mr. markets
emotions
mr. markets fooling you what you have to
do is you have to go in there and you
have to look at what mr. market is
offering you and you have to remain calm
and competent you have to figure out
what the company's worth and not get
wrapped up in the emotion that's behind
mr. market and the things that he
creates and so that's where that that's
where the saying comes from Warren
Buffett where mr. market is your servant
because he's providing you either really
good deals or he's providing you really
crappy deals and he's not your guy so
you don't follow his emotion you you
capitalize off of what he's doing and so
that's that's the thing that you really
got to take away from this lesson is the
market is sometimes going to give you
great deals and you got to take them and
other times the markets going to give
you horrible deals and you can't be
fooled by the emotion of
everybody else and you have to be able
to determine what the value of a stock
really is so that concludes lesson one
from unit three and the first lesson
objective is what is a stock the second
is how does the stock market work the
third is what is a limit order in a stop
order and the fourth is understanding
benjamin graham's mr. market so we'll
see in the next lesson