The Sharemarket

USA Sharemarkets
In the USA the exchanges are completely automated. The orders you place with your broker are placed into the stock exchange computer via a computer trading system that is usually unique to each exchange.

There is a common misconception that trading through the Internet means that you are placing your orders directly into the stock exchange. Unfortunately this is not the case. In the USA, your order must first be processed and authorised through your stockbroker’s computer system.

This results in a slight delay from when you hit the 'buy' key, to when you actually get your order filled in the exchange computer system. This delay can be frustrating for you as an individual but is a fraction of the time that an order used to take, under an open-outcry system.

As technology and security systems improve, individuals will be able to trade directly between each other via open computer systems. This will result in fast and accurate trading, but will certainly increase the speed and volatility of the already busy modern exchanges.

Sharemarkets are Big Business
The buying and selling of shares on the world sharemarket is big business. This is why we hear so much about it in the news. The turnover in shares at the world’s largest sharemarkets runs into the trillions of dollars. Shares actually make up a relatively small portion of a sharemarket’s turnover, with vast sums of money being channelled through other financial instruments, such as derivatives, futures, options and bonds.

Many people have investments in shares, listed in the various stock exchanges, with many of them making a living by trading shares alone. Others keep their shares hoping they will grow in value over time.

Psychology in the Market
There are 2 investment approaches, which a successful investor would have to adopt in order to minimise their risk:

  1. Fundamental investing approach: Here the investor looks at the financial statements of the company and assesses the future potential.

  2. Technical investing approach: Here the investor looks at the psychology of the performance of the market over time and tries to predict the rises and falls.

It is easy to get immersed in the financial analysis of the performances of various companies and it is easy to feel that this is all one has to do in order to make a sound investment decision. Investors, however, should not ignore the many other factors that are associated with the psychology of investment, such as performance of people, their greed, their enthusiasm, their panic, the fears, etc, because all these have an influence on how things happen in the market and therefore the share prices.

That is, the psychology of the people and their reaction to the perception of what is happening on the market strongly determines the rise and fall of share prices. For example, if there is a high demand for shares and there are a small number of shares available, this will drive the share price up. On the other hand, if there is a lot of shares available and a shortage of buyers, the share price will drop because there is a low demand.

If there is a large demand, investors are willing to pay more in order to purchase the shares desired and this will have the effect of driving the share price up even further. If sellers are willing to accept a lower share price in order to sell out, then this will have the effect of driving the share price down.

The sharemarket is very volatile and moves up and down in a cycle. The sharemarket is really a total mix of different types of emotion and responses from people, which includes optimism, pessimism, hope, fear, logic, greed and madness.

A lot of investors try and predict the workings of the market. If investors are tempted to do this, they need to look at the market from the inside, as well as from the outside. That is, they need to do an analysis of the company and its performance, as well as an analysis of how the people in the marketplace react under certain conditions.