Curious about how markets work? This video from our partner – Dimensional Fund Advisors (DFA) explains how security prices are set and how they change based on the collective knowledge of buyers and sellers. Armed with this information, investors will better understand how and why markets work.
This 3 minute video describes the power of the stock market to collect the views of all participants. This information is readily available to all as it is reflected in the current stock price. These prices reflect the collective knowledge of these market participants.
The scale of these daily transactions is staggering. In 2012, there were nearly 39 million worldwide trades in the global stock markets that occurred each day on average valued at almost $200 Billion. That collective knowledge is powerful.
The video uses the analogy of supermarket prices for fish to provide understanding on how buyers of fish decide whether to buy at the price the product is offered. The prices will change as the customer demand changes and new information arises. The same holds true for stock prices.
The video also describes why successful investing does not require investors to anticipate the movement of stock prices. Instead investors should use the collective knowledge that is already in the prices as their guide.
As we have discussed many times in the past, stocks should be purchased with the intent to hold for the long-term to capture the premium the market provides for taking on the additional risk.
A post that highlights a book on the stock market history is located here: Stocks for the Long Run.
Work with a financial advisor to help you tap into this collective wisdom.
Together we know more than we do alone.
Click on the link to the DFA video: THE POWER OF MARKETS
If you enjoyed this article, CLICK HERE to subscribe to free updates from “Roots of Wealth”.
(1) Worldwide Federation of Exchanges