Lesson 2: This Little Piggy Went To Market
A lesson in price dynamics
"Son," I began, setting down my coffee mug next on the table next to my laptop with stock charts I was reviewing. "We've talked about how everyone is a trader. (Our first lesson) Now that you know you're in the game, you need to learn how to play it and play it well."
He nodded, "Why do prices change?" I asked him, recalling our conversation.
"Supply and demand," he responded promptly, a hint of pride in his voice.
"Very good. But what does that really mean?" I leaned back, giving him space to think.
"If people want something and there isn't a lot of it, prices go up," he said, his eyes lighting up with understanding.
"Exactly," I agreed, "Let’s take use an example …. about when the price of gas goes up?"
"If they have trouble importing it... perhaps there’s a hurricane, or if the refineries have problems, if people are using more gas because it's summer and they're traveling more, or if there's an issue in oil-producing countries," he listed, my son’s enthusiasm growing with each point.
"Exactly," I said, impressed by his grasp. "But let's dive deeper into why price changes. Imagine you're investing in a company like Tesla."
He perked up at the mention of Tesla; he knew their cars, but not their stocks.
"Say Tesla announces a breakthrough in auto-driving technology. What happens?"
"People would want to buy more Tesla stocks because they think the company will make more money," he reasoned.
"Exactly, demand goes up. But remember, the supply of Tesla shares doesn't change overnight. So, what happens to the price?"
"It goes up because everyone wants it, but there's not more of it to buy," he deduced.
"Very good! Now, imagine if later that month, news breaks that this new technology might face regulatory hurdles."
He paused, thinking. "People might get scared and want to sell their shares."
"And that's where emotions play a part. Fear can drive prices down just as much as greed can drive them up. Traders might start selling, increasing the supply of shares on the market, and if the demand doesn't keep pace, the price drops," I added.
We sat there for a moment, the morning light filtering through the window, casting a warm glow over our impromptu classroom.
"Prices aren't just numbers," I continued, "they're stories of supply, demand, fear, greed, innovation, and sometimes, just plain luck or misfortune. Like when a hurricane hits and disrupts oil production, or when a new government policy promises to bolster an industry, or perhaps a popular cult icon makes a cryptic post on Twitter, like this:
I then showed my son how the price of GameStop:
and showed how it spiked immediately after the post. My son was shocked. “Yeah, I don’t understand it either.” I shrugged and laughed.
"Remember, son, markets are like living organisms, they react to news, events, rumors, and the collective mood of its participants. It's about understanding not just the what, but the why behind the price movements."
He nodded, the complexity of it all beginning to take shape in his mind.
"And that," I concluded, "is how you start to play the game not just well, but with wisdom. Keep learning, keep observing, and always question why things are moving the way they do. That's how you'll master this game."
With that, we turned back to my charts, and proceeded to dissect the day's news, not just as numbers, and assess how the markets
Cheers,
Disclaimers
“Not Investment Advice Disclaimer”
The content covered in this blog is NOT to be considered as investment advice. I'm NOT a financial adviser. These are only my own personal and speculative opinions, ideas, theories, hypotheses, charts, technical analysis (TA), insights, curated news publications, and price prediction(s).
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