Chapter 5. HOW STOCK MARKETS REALLY WORK

 

Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.

 
 --Thomas Sowell
 

It is the fundamental wisdom of the capitalist system that it functions irrespective of the wisdom or the stupidity of the capitalists.

 
 --Gustav Stolper

This chapter won't give a usual view of how stock markets work. We're not going to cover the basics of trade, or how the Federal Reserve works, or financial statements, or any of that. Those are fine and great things, but they're not what this book is about.

This chapter provides a way to understand how markets work for investors. Too many folks believe that if you can understand how the economy functions, perfect vision of markets will naturally follow. Nope! Markets and economies are mechanically different beasts, requiring completely different approaches to understand.

This book is about how to think about markets and understand them better, but it isn't to say you can just disregard economic things. It's important for investors to know how the economy works because otherwise one cannot critique or corroborate other assessments or determine what is relevant and irrelevant for stocks. For guides on how to analyze and understand how sectors of the economy work, I recommend the Fisher Investments On series. Each volume covers a specific sector of the global economy and strategies ...

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