Investing made easier: Think of the stock market as a supermarket, because that’s what it is

Susan
By Susan September 25, 2013 14:30

Investing made easier: Think of the stock market as a supermarket, because that’s what it is

 

An extremely common reaction to investing in the stock market, especially from women, is that it’s too risky, too dangerous, and akin to gambling (Short Term Trading and Spread Betting I consider gambling but not Investing in the Markets with a long term view).

People often think of the stock market as a place that swallows money and wreaks havoc with emotions. In their imagination, it’s an overwhelming place, with “hyper” people screaming “BUY BUY BUY!!”, their eyes riveted to a flurry of figures cascading on four screens simultaneously.

This is not exactly the stock market – this can sometimes be the atmosphere at the actual, physical building known as a stock exchange. But the abstraction that is the stock market can be compared to something much tamer: a supermarket with a difference.

 

You get in with a list, buy what you need, and leave

 

Think of doing your weekly shopping: you might come in with a list of things you need, wander the aisle and fill your trolley, while availing of one or two promotions. Then you go to checkout and pay.

With a few differences, the stock market functions on the same principle: you go to the stock market to buy, not bread and milk, but “bits” of companies. The “stocks” are those bits. Instead of having to go to the farm to buy your milk, then to the manufacturer to buy kitchen rolls, you prefer to go to the supermarket, where you can find milk conveniently packaged and stock up on kitchen roll at the same time. Similarly, instead of having to go to each company separately, you go to the stock market and buy those stocks you are interested in.

The shopkeeper acts as a broker between the different providers and the customers: the shopkeeper/broker deals with the providers and companies wanting to sell their product; they might repackage that product to make it more relevant to customers’ needs, and they help customers process the sale.

 

You can pay attention to what happens

in the supermarket, but you don’t have to,

at least not all of the time

 

Investing in the stock market means you use the stock market like a supermarket: you go to the supermarket to buy something, but you are not interested in the supermarket itself. The supermarket is just the place you go to procure certain things. Would you pay attention to the drama of people quibbling over different brands of kitchen rolls in one aisle? This might strike you as ludicrous, but when it comes to the stock market, this is what the media and most people very often focus on. But it is only one aspect of the stock market.

Now people quibbling over kitchen rolls might actually be important and alert you to deeper underlying trends: the fluctuating price of wood pulp, for example, or the rise of the 100% recycled kitchen roll. This is why keeping an eye on stock market fluctuations is important, if you have the perspective to make sense of those fluctuations. But you don’t have to focus solely on those things to successfully buy stocks in the stock market.

 

Not everybody has the same shopping habits

 

In the stock market, just like in the supermarket, different shoppers will have different strategies: some will shop for value, some will shop for price only, others will want to impress by buying popular products, others still will buy whatever is on discount, hoping to bag a bargain. In this respect the supermarket and the stock market are almost identical.

It might also be that some people don’t like the marketing tactics and products of supermarkets and believe they get better value for money elsewhere, for example the corner shop down the road. As a result they never see the door of the bigger supermarket. Similarly, some people prefer to save their money in a credit union or post office, instead of investing it in the markets.

 

When shopping, do you buy

depending on what others are buying?

 

But imagine you went to the supermarket and started to watch other people’s behaviour. Instead of buying what you came in to buy with your shopping list, imagine you noticed that a lot of people were buying a certain product. You look behind you and you see a stampede coming, as more and more people are buying that certain thing. Before the big herd comes, you decide to grab one of those popular things before they run out.

Or it could be that you notice people are not buying a certain item because their attention is on the first, more popular item. But you have a feeling that the unpopular item is underpriced, so you fill your trolley with as many as you can buy, just because nobody is buying it yet.

These behaviours reflect one of two different stock market strategies: either you use the stock market to buy what you came in to buy according to your list, and that’s investing, or you buy depending on what others are doing, and hoping to get in there faster than them, and that’s speculating.

Now the comparison wouldn’t hold if we didn’t add this: depending how many people buy or don’t buy an item, the supermarket changes its pricing, although it has fixed “opening” and “closing” prices. A popular item will rise in price as it becomes more popular, rewarding those who bought it early, and an unpopular item will become cheaper as less and less people want to buy it.

 

What if the supermarket allowed you

to resell what you just bought?

 

And for the comparison to be really complete, we would have to add that, as soon as you have bought something in the supermarket, you can set up your own stall in the supermarket itself and sell what you have bought.

If a stock market customer is an investor, they will typically hold the stocks they have bought for longer; they will buy based on the actual use they want to make of the product (because it serves their objectives), as opposed to buying it because they see other people buying it too; and they won’t make decisions based on short-term price fluctutations. Just like in a supermarket, you might buy a specific brand of a product because it is of higher quality, and disregard another product although it is on special offer: same thing in the stock market.

The analogy can be brought even further: some people will have a personal shopper coming along with them to advise them. In the stock market, this is known as an advisory account. Or they might send in somebody else to do their shopping for them: this would be a discretionary account. But of course you can always do your own shopping, you just need somebody to process the sale: this is known as execution only.

 

Make a list, shop with your tummy full,

and know the dangers of retail therapy:

same thing in the stock market

 

Now many people recommend that you make a list before you go to the supermarket, to make sure that you get what you need, and only what you need. Taking a list with you is a good way to prevent impulse spending in the supermarket. The same applies to the stock market: if you don’t have a list (aka an investing plan), it’s easy to get derailed by the latest shiny object and to buy things that don’t suit you.

And of course some people go to the supermarket just to browse through the aisles, for a bit of retail therapy – this is also a danger in the stock market. Some people like the emotional high they get from impulse spending, just like some people like the emotional rollercoaster that comes with stock market fluctuations.

Other motivations for spending money might be keeping up with the Joneses, or getting a kick from making a successful transaction (for example bagging a bargain): these same motivations can be seen in the stock market. But be careful as there is a very high cost to this if you take your eye off the ball.

Hopefully this analogy has taken away some of the “mystery” around stock market investing. Now what’s the next step? A good place to start would be to educate yourself about the different products available in the stock market (such as Gillenmarkets), and what they can do for you, just like you would compare the merits of supermarket products.

And don’t forget to have a good think about what your own objectives are – in the same way that you will waste food if you buy things you don’t actually use, in the stock market you have to know what you want to achieve or you might end up wasting your money.

 

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Susan
By Susan September 25, 2013 14:30