What is a Market, Anyway?

In my last post we looked at different investment categories and I started talking about risk. Risk is a really big deal and it could use a lot of extra discussion. So, as I began to write a post about the different kinds of perils you face in investing, the concept of market risk came up. But that really begs the question: what is a market anyway? So…

What is a Market Anyway

At its most basic, a market is just a place where people get together to buy and sell stuff. Even stuff like fruits, vegetables, or Mac and Cheese. No surprise there, right? But for us, a market is a place where people buy and sell something of economic or investment value. Think of things like stocks or bonds, or commodities like gold or copper or soybeans or cotton. There’s even an exchange if you want to contract a container ship, like to ship motorcycles to China. Try flinging that out at your next dinner party!

Container Ships in San Francisco

This place where people gather can be in a specific building, or it can spread around the world by computers. They can even be under a tree, which is where the New York Stock Exchange started in 1792. That’s the rumor anyway!

The New York Stock Exchange. What a lot of us think of as "the stock market".

The New York Stock Exchange – Photo by Arnoldius

What Makes a Successful Market

On the surface it’s hard to say what makes a stock market tick. Is it a bunch of sophisticated computers? Yep. And a really amazing communications system? Absolutely. But in the end what defines a successful market is trust. Trust that you as a seller of something and I as a buyer of that something are getting the prices that we agreed to when making a “trade”. And trust that our trade will be executed as quickly and efficiently as possible.

Inside the NYSE, what a lot of people think of as "the stock market".

Interior of the New York Stock Exchange – Photo by Kevin Hutchinson

Notice I didn’t say that either of us are getting the “right price” or even a “fair price”.  Just that we’re getting the price that we agreed to. Because markets aren’t designed to stop people from making investment mistakes. Just that their investments – bad or good-  will be completed transparently and efficiently!

Next post we’ll pick up the topic of risk, and after that we’ll talk about different ways can invest.

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