With the increase in technology and the move towards algorithmic trading, stock markets all over the world have changed over the last few years. Brokers were once the linchpins of the stock market but now have been gradually replaced by quicker and cheaper computers. With the influence of brokers reducing as years go by, here are 10 secrets brokers don’t want you to know about how the stock market really works.
1) The market is run by robots, not people – These days, the vast majority of trades that are placed are not done by big asset management firms, rather they are done by computerized algorithmic traders looking to exploit very short-term price discrepancies.
2) The Stock Market can be predicted by Social Media – A recent report showed that scientists accurately predicted 87.6% of daily changes in the Dow Jones Industrial Index when they studied the mood of large-scale Twitter feeds.
3) The market has had an exceptional performance over the last five years – Despite the constant grumbling, stock markets around the world have had significant growth, or an extended bull market over the past 5 years. Take the the S&P 500 for instance, it is up more than 100% since the market crashed more than 5 years ago.
4) Every Investor will always pay more for a stock than it’s worth, and will always sell it for less than it’s worth – This is as a result of the bid-ask spread. The bid-ask spread is a discrepancy where Purchases pay the ask price whilst Sellers receive the bid price. The more liquid a market, the smaller the discrepancy between the bid-ask spread.
5) The “hottest deal” may in fact be an overvalued investment – As markets are said to be fully efficient, especially those in the US and UK, by the time a report or article comes out saying that a stock is undervalued, the price of that stocks will already have risen to its optimum price – that is if the stock was undervalued in the first place.
6) Contrary to popular belief, online traders don’t have a direct connection to the market – You might be under the impression that when you call or place a trade online with your broker, the trade instantly goes through. This is not true as your broker has the power to chose which market to send it to, and prices can change before it reaches its destination. Investors don’t always receive the price they saw on their screen or the price their broker quoted over the phone.
7) A broker’s allegiance may not always be with you – There are times when stockbrokers ally themselves to shareholders rather than clients for personal gain. This follows the common notion of never trusting a stock broker.
8) Big Banking Institutions and Top Fund Managers buy stocks when prices fall and sell when they are high – This is practically common sense but it is amazing to find out how many investors do the opposite. Most investors are wired to buy when the stock market is rallying and sell when the stock market has tanked for fear of losing even more money.
9) Your fully invested portfolio’s returns and volatility depend on whether you’ve chosen high or low beta stocks – You’ve probably heard of risk in investing and the higher risk you take, the more your potential returns will be. In stock market terms, Beta is another name for the amount of risk you are willing to take. High-risk stocks have a Beta of 2 and will be more volatile in the market. If you want to reduce your risk exposure, increase the number of low Beta stocks in your portfolio by buying defensive stocks.
10) Education has a high return on Investment – A recent report has analyzed that getting a university degree is still more profitable than long-term investments in stocks, bonds and even property to an extent. The benefits of a university education is equivalent to having an investment that earns 15.2% annually.
I hope this article has given you a bit more insight on how the stock market works. The stock market is a giant game of (calculated) chance, but you can’t win if you don’t know the rules. It is important to research your stock broker to ensure they have your best interests at hand and to ensure you are getting the best deal possible. Remember, even if a stockbroker gives you their stock picks, you don’t have to follow it as stock brokers are not always right – if they were, they would be billionaires. The thing to do is not follow the crowd, and remember the golden rule: buy low and sell high!