What You Should Know About The Stock Market

Hi Erik and Dasickis, thanks for the wonderful, insightful comments – it makes writing articles so much fun :).

I’ve put together a sample spreadsheet that uses various factors to estimate how close a given stock is to an “ideal” stock:

(download: http://betterexplained.com/wp-content/uploads/stock/StockValuationExample.xls)

This computes the Pythagorean Distance via various metrics. However, the tricky part is appropriately weighing and scaling the factors, as all are not equally important. Still, it’s a starting point to develop your own model.

Wonderful article and great insightful comments. Please keep up the good work!

Best Regards,

Thanks Prateek!

Recently I’ve been reading about involvement with international stocks as well as small, obscure stocks (see http://www.fool.com/investing/small-cap/2006/12/29/the-markets-10-best-stocks-revisited.aspx). I’ve been getting the same message that Warren Buffet talks about, look for companies with an intrinsic value higher than their traded value. Have you seen similar patterns in choosing stocks?

Hi Dasickis, I’m more of an index fund investor – I generally have my savings in various asset classes (international, small cap, large cap, fixed income).

I do have a few tech stocks but that’s mostly because I enjoy the industry and like to see some of this theory used in real life :).

What do you use to create these graphics (in this post and in general) they are very well done and help a lot in understanding.

Hi John, glad you liked it – I agree that diagrams help so much when explaining new ideas.

I used PowerPoint 2007 to create the images – I drew boxes, lines, and colored them appropriately.

[…] What You Should Know About The Stock Market […]

excellent Mr. Azad!!! I really enjoyed reading this and all the comments after. Having felt your lead punches today all I can say is don’t get anymore insight into sparring or I will have to retire!!!

Thanks Mr. Rose! Yeah, unfortunately for me sparring only seems to develop on the dojo floor and not on the web :slight_smile:

Thanks, glad you liked it!

Excellent article Kalid, may I ask what s/w you use to create the graphics in your posts?

Hi there, glad you enjoyed it. I use PowerPoint 2007 to make the diagrams.

Wow Khalid. What a great teacher You are. Thanks much, I cleared with your help some basic trading terms that were long overdue in mind to get cleared. The best explanation I’ve found on the net! THANKS. Raph

Thanks Raph, glad you found it useful!

[…] Wrongo! Talk like that will get you burned on the stock market: investment returns are multiplied, not added! We can’t be all willy-nilly and use the arithmetic mean — we need to find the actual rate of return: […]

Incredibly useful. Most sites ramble but now i understand it, and that is a miracle.
Pocket the pride from this knowledge transaction. Well done and thanks. (The pocketing is done through the knowledge market called the internet)

I have a question for you that you may or may not know the answer to but here goes… who was the first business or businesses on the net to implement the use of a hidden floor or secret selling price?

Hi Glen, that’s a good question, unfortunately I don’t know the answer offhand (I haven’t used that many auction sites). Yahoo answers may be a good way to find out.

great article. I was looking for this explanation for a long time. The question I was looking for was why stock prices rise and fall - the mechanics(who puts up/down the price) and not the reasons(micro and macro economics).

To go one further - the market is very dynamic - are there automatic “rules” that make the prices go up and down on stocks as well? Or is it purely individual buyers setting limits manually, stock by stock?

For example - a stock is sold at $40, buyers start buying it, if the seller is smart, he would try and sell it for more - is this action automatic or manual?