TradingBlog

One day after a predominantly stunning trading disaster, my Uncle Joe took me aside and consoled me with some hard facts about how the stock market works. Uncle Joe owns a very distinctive company and has an insider’s perspective on how stock price movement is managed.

Widgets & Co, is the only company in US distributes widget with permit. The amount of money he made each time he bought and sold was quite petite, and the number of dealings per day was also low. Having given the problem some thought, he surprised what would occur if he told to a fellow citizen that widgets could soon be in short supply.

Many days passed and widget sales remained at their normal level. It seemed his sketch had worked and everyone was contented. His clients were happy as they knew that widgets would soon be in petite supply and so their value would increase. Uncle Joe was happy because he was selling more widgets and making more money every day.

The next day he announced a price raise, but still believing there would soon be a widget shortage, his customers continued to buy in ever larger quantities! As the weeks accepted he steadily improved his prices elevated, but still the buyers continued to buy. A few of his more shrewd customers started to sell their widgets back to him, taking their profits, but Uncle Joe didn’t mind as he still had plenty of willing buyers. This was all good news for Uncle Joe, until one day, he all of a sudden realized with some panic that his warehouse was now looking very empty indeed.

Inquiring into what that rumor might be, Uncle Joe learned that his neighbor had heard that another, much bigger widget distribution company was setting up business in the area. Being intelligent, Uncle Joe realized that destiny had given him the answer on a plate. More importantly, widget values were likely to drop dramatically in price.

As they parted company, Uncle Joe giggled to himself at having such good wealth and such a helpful rumor for a neighbor. Within days he had many of customers outside his warehouse doors begging him to buy back their widgets. With so many customers selling, he dropped his prices quickly, making people even more desperate to sell before their widgets became worthless! As the prices fell further, more and more people cracked under the pressure. Uncle Joe was now buying back an enormous volume of widgets.

To most people, the sudden moves seen in the stock market are a complete mystery. More curious is when good news appears and the market or stock falls, or equally odd it rises on bad news or results. Stranger still is the fact that the market always falls faster than it rises.