It was heartbreaking to read the news of Alexander E. Kearns’s suicide, and to know that he felt he had to take his life because he got into debts of $730,000. What made this worse, was that subsequent revelations indicated that he wasn’t necessarily truly in debt of $730,000, and that could have been a temporary balance before settlement.
I couldn’t help but wonder if this could have been avoided. In Kearns’ last note, he said that he had ‘no clue’ what he was doing. Due to the uncertainty around economic conditions from CoVid-19 and other global developments, it’s inevitable that our youths would have to look at alternative means of earning income other than getting a job. Trading is becoming one common alternative, with the growing ease of opening a trading account, the gamification of the trading experience by brokerages. Of concern though, is that most may not have a foundational understanding of what they are dabbing in. I believe that now, more than ever, we need to teach our teenagers the basics of investments so that they know what they are doing.
As our tribute to Kearns, we are thus covering a mini-series on the basics of teaching teenagers about investments and trading. In this article, we seek to give an overview while clarifying some critical key concepts around trading and investments.
The Difference between Trading & Investing
Visualise a marketplace where there are many individuals in the crowd. Some are there with money to purchase a product while others are there to sell their produce.
Using this analogy of the marketplace:
People who are looking to invest are there to purchase products that allow them to reap returns in the long run.
An example would be of someone buying a hen, so that the hen lay eggs which can either be sold for money, or grown into chickens for more eggs.
People who are looking to trade, however, do not want to hold on to the products. They want returns quick.
In this scenario, they do not want to hold on to the hens for long. They will buy the hens cheap and then immediately sell them to another person for a higher place. At the end of the day, when they leave the marketplace, they are not holding on to any hens.
The Basics of The Marketplace
When we trade/invest, this marketplace exists. It’s digital so we do not see everyone on it.
Similar to a physical marketplace though, there are various products and variations of products available. What we need to decide on, is what product and its variation we are interested in. Just as how a hen is different from a cow, or a hamper of fresh produce or a basket of ready cooked food, you need to decide which product you are interested in. Then looking into the product, you need to consider which variation you want to buy or sell. An example of this is milk – after you decided you want to look at milk, you need to consider if it’s goat or cow or almond.
If you are wondering how to pick a product and its variation, we will cover more on this and factors of consideration in a later article.
This trading marketplace is however, slightly different from our physical markets. Within each product and its’ variation, there are no stalls, but rather there are investors (people looking to buy and hold or sell what they have on hand) and traders (people looking to buy and sell). What you will get to see is the prices that people are looking to buy and sell at and their respective quantities.
The key here to trading is thus price and volume
Because it’s so chaotic, you need matchmakers. That’s what the brokerage/ trading houses do – they match buyers to sellers who agree on a price and quantity, then they take a commission fee for that pairing.
As long as a match exists, you can make a trade, buying/selling your desired item for your set price and quantity. If not, you either wait or adjust your price to better your chances of finding a match.
The Key Players in the Marketplace
We have previously mentioned the brokerage/trading houses. They are the ones that become your scouts and/or matchmakers.
Two other critical players who make the marketplace exist are the produce-maker and the government. The government/ regulating body polices the marketplace to make sure that everyone plays within the pre-defined rules in the marketplace. They bring order and confidence that this is a safe place to venture into. On the produce-makers, in our analogy, they are those who create products for sales. In the trading marketplace, these are the listed companies or fund houses who create the investment products that people can invest/trade.
At the heart of the marketplace’s actions, we have the traders, speculators and investors. Some are individuals, some represent organisations and all have different priorities and interests.
In the marketplace, the roles and priorities of different players come together, showing up with different behaviours. These interactions then give rise to the price and quantity movements for the various products. Since it is almost impossible to predict the cumulative consequences of these interactions, there is thus uncertainty in the marketplace which allows people to potential earn or lose money.
We hope this has been a useful read to give you an overview of how the investment/trading market works. Watch out for our next article which will delve into the risks and benefits of investing versus trading.