Who is smarter? The buyer or the seller.
Let me ask this way. Why do you buy a stock ? You expect the price to go up. Right ?
Why do you sell a stock ? You expect the price to fall shortly. Is that correct ? That is judgement.
Now when you buy, you need a seller and you need a buyer when you sell. Obviously the guy on the other side has an exact opposite judgement. Who is right ?
You or the guy on the other side ?
My questions about the stock market have hardened into a larger puzzle. The industry of stock market appears to be built largely on an illusion of skill.
Billions of shares are traded every day, with many people buying each stock and others selling it to them. It is not unusual for more than hundred million shares of a single stock to change hands in one day.
Most of the buyers and sellers know that they have the same information; they exchange the stocks primarily because they have different opinions.
The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop.
The puzzle is why buyers and sellers alike think that the current price is wrong. What makes them believe they know more about what the price should be than the market does?
For most of them, that belief is an illusion.
In its broad outlines, the standard theory of how the stock market works is accepted by all the participants in the industry.
The markets hinge on the central idea that a stocks price incorporates all the available knowledge about the value of the company and the best predictions about the future of the stock.
If some people believe that the price of a stock will be higher tomorrow, they will buy more of it today. This, in turn, will cause its price to rise.
If all assets in a market are correctly priced, no one can expect either to gain or to lose by trading. Perfect prices leave no scope for cleverness, but they also protect fools from their own folly.
Many individual investors lose consistently by trading.
By and large, the success in stock market is not achieved by trading, but by learning to evaluate a stock and buying quality stocks when the markets are on a bargain sale.
That needs a lot of guts!!!!!