Author: Zen and the Art of Computer Programming
1 Introduction
Overview
In the fields of business, finance and economics, stocks are a commodity with special value, a value investment tool formed through accumulated transactions over a period of time. However, due to the complexity of the stock market, high volatility, and susceptibility to black swan events, you need to be extra careful when investing in stocks. This article will provide readers with a systematic and complete learning material by combining theory and practice to help readers better understand the operating mechanism of the stock market and its principles.
Purpose
The main purpose of this article is to introduce the operating mechanism of the stock market by elaborating some of the most basic theoretical concepts in the stock market, and to further teach readers how to make investment decisions. The article attempts to enable readers to truly understand and master the important concepts in the stock market, including "value", "volatility", "black swan", "investment cycle", etc., and to deepen their understanding through intuitive charts or text. The understanding of these concepts allows them to invest in stocks in their own way, and at the same time reap the joy of investment and financial returns.
Article frame
The article is divided into four parts: preface, table of contents, main text and appendix. Among them, the preface is used to explain the background, purpose, and reading suggestions of the article. The table of contents is an index of the full text. The main text is composed of the following six parts:
- 1. Background introduction
- 2. Explanation of basic concepts and terms
- 3. A brief introduction to value, volatility, black swan, investment cycle and other related concepts
- 4. “Random walk” strategy and its characteristics
- 5. Establishment and application of “price prediction” model
- 6. Buying and selling behavior and market efficiency in the stock market. There are some typical application cases later. I hope it can help readers better understand this article.
2. Explanation of basic concepts and terms
stock market
The stock market is an open market that involves a large number of unfamiliar but extremely high-value securities investment products, including listed companies, fund companies, private equity funds, etc. It is currently one of the largest, most active and largest trading markets in the world, and is very convenient, extensive and efficient for the investment activities of individuals and institutions. As of now, the size of the stock market has exceeded $3.7 billion.price
Stock price (also known as "share price") is an indicator of the current status of a stock over a certain period of time. When the price of a stock rises or falls, investors will focus on the stock, thinking that it may change direction in the short term. Therefore, stock price changes will arouse huge investor interest and attention. Stock prices exhibit certain long-term movements over time. Whenever stock prices rise or fall, they may be accompanied by stock price fluctuations.Supply and demand
"Supply and demand relationship" is the price structure set by a market entity (such as a company, government, etc.) to purchase goods, services or labor services from customers in order to earn a price difference. Normally, the relationship between supply and demand is stable but fluctuates, and gradually tends to balance over time. In the supply and demand relationship, there are two types of role players: suppliers and demanders. Suppliers are producers, service providers, etc. who provide resources, while demanders are consumers who need resources. Supply and demand are determined by price, quality, quantity, time, and licensing.value
"Value" refers to the sum of feelings and perceptions of a stock held by stock holders. Generally speaking, the value of a stock is determined by the time, money, effort and will invested by the stock holder. The value of a stock mainly depends on its own and the market's value evaluation standards. If the value of a stock is relatively high, its price will also be high; if the value of a stock is low, its price will also be low. It can be seen that no one can accurately predict the value of stocks and can only make comparative judgments based on historical data.Volatility
"Volatility" refers to the error in investors' estimates of a stock's return or value. In actual operations, volatility is generally calculated as the Mean Absolute Deviation (MAD). Stock market volatility is higher than in most countries. There are two reasons: one is the rapid development of the market, which causes the growth and deceleration rate of stocks to be different from bank deposit interest rates, mortgage interest rates, etc.; the other reason is personal operating behaviors, such as position management, warehouse receipt risks, etc.black swan event
A "black swan event" refers to a violent fluctuation in stock prices due to force majeure factors, causing market stock prices to plummet overnight, commonly known as "Geneva oil prices." Black swan events play an important role in the stock market. The earliest black swan event occurred in 2007, when global stock markets instantly collapsed, causing the U.S. stock market to plummet nearly 9% the next day. The frequent occurrence of black swan events in recent years has also caused investors to suffer trauma, including losses, fluctuations in profits, and even crises in confidence.investment cycle
"Investment cycle" refers to the life cycle of securities investment products circulating in the market during the entire issuance period. The longer the cycle, the higher the value of the securities investment products. At different investment stages, the volatility of the stock market is also different. In some stages, the market volatility is very low, and in other stages, the market location is very high. Therefore, different investors choose different periods as the best investment opportunities.3. A brief introduction to value, volatility, black swan, investment cycle and other related concepts
value
What is value?
Value refers to the sum of the emotions and perceptions of a stock holder. The value of a stock is determined by the time, money, effort and will invested by the holder.Why should it be valuable?
Because only those who have value may hold, buy, operate and use the stock. The value of a stock mainly depends on its own and the market's value evaluation standards. If the value of a stock is relatively high, its price will also be high; if the value of a stock is low, its price will also be low. It can be seen that no one can accurately predict the value of stocks and can only make comparative judgments based on historical data.What are the valuable reasons?
Valuable reasons mainly include: - Dividends: Dividends are a means to protect the interests of shareholders and corporate profits. Through dividends, companies achieve long-term development, provide shareholders with long-term stable income, and encourage investors to continue to hold stocks, which is why many investors buy long-term stocks.
- Wealth appreciation: Stock holders spend more time and energy on simpler daily expenses. Obtain more dividends in various competitions and market competitions. Once obtained, more and more wealth appreciation will occur.
- Guarantee: Due to the stable income and ability of stocks to continue to increase in value, it is also the safest way to invest. When a company goes bankrupt or encounters a crisis, it can still guarantee sufficient principal payment from the loan to maintain normal operations.
- Personalization: Stocks allow investors to choose securities based on their own different values and preferences through interactions with others. This kind of personalization provides investors with a wealth of investment options and allows them to feel more involved.
- Nutritional value: Stocks are a commodity with a high density of nutritional value. The three main foods at the top of the human food chain - fresh fish, vegetables and fruits - can all be traded through stock markets. Stocks with nutritional value tend to have higher returns due to their unique nutritional content.
How to measure the value of a stock?
The value of stocks can be measured according to the following criteria: - Free cash flow: The total cash outflow divided by the total cash inflow, which measures the return received by investors on their investment in production and operating activities.
- Cash flow ratio: The share price per share divided by the net assets per share, which measures the ratio between the value of shares outstanding in the market and its net asset value.
- Remuneration: that is, the correlation between the performance of a company and its remuneration. It measures whether the income obtained by the enterprise is related to the amount of equity it obtains.
- Consumer insights: The interactive relationship between investors and consumers, which measures the social benefits of stocks and people's attitudes towards stocks.
- Luck: That is, whether the stock trend is accidental or not, it measures the market's predictive ability.
Volatility
What is volatility?
Volatility refers to investors' estimation error of a stock's return or value. Volatility is generally calculated as the Mean Absolute Deviation (MAD).What is the definition of volatility?
MAD = mean(|Xi - median(X)|) Where, X is a set of data, Xi is the i-th element in X, and the median() function returns the median of X.What is the role of volatility?
Volatility can help investors quickly and accurately estimate the range of fluctuations in stock prices at any time when buying and selling stocks, and make judgments on buying and selling signals accordingly. Volatility has the following advantages: - It is easier to identify patterns in stock price changes.
- It can help analyze trends and determine the direction of stock trends.
- Improve investors’ prediction accuracy.
- Helps determine the best time to sell and avoid selling high and buying low.
- Reduce the risk of random buying.
- It can be used to evaluate and monitor the degree of fluctuation of stock prices, and then grasp the true situation of stock prices.
black swan event
What is a black swan event?
Black swan events refer to violent fluctuations in stock prices due to force majeure factors, causing market stock prices to plummet overnight, commonly known as "Geneva oil prices."How do black swan events occur?
Due to force majeure, such as global warming, earthquakes, political changes, macroeconomic policy changes, etc., the stock market plummeted, creating a "black swan event" and triggering market panic.What is the impact of black swan events?
Black swan events directly hit investor confidence, weakened investors' determination to buy, caused stock valuations to fall rapidly, and triggered an economic recession. At the same time, investors are more inclined to hold bearish stocks.How to prevent black swan events?
Methods to prevent black swan events include: - Use professional technical analysis tools to quickly determine whether the stock price has bottomed out and avoid investment losses caused by a sharp drop.
- Constantly track the latest market news, adjust positions in a timely manner, and intervene in defensive measures in advance.
- Have a clear investment strategy, consider investment goals from a long-term perspective, and formulate corresponding exit strategies.
- Make full use of various preferential policies and incentive plans to improve personal risk tolerance.
investment cycle
What is an investment cycle?
The investment cycle refers to the life cycle of securities investment products circulating in the market during the entire issuance period. The longer the cycle, the higher the value of the securities investment products.What are the characteristics of the investment cycle?
The investment cycle is generally divided into three stages: - Offering Period: The offering period when a security is new and is only available for trading by individuals and minority shareholders.
- Trading period: The stock price is in a stage with obvious fluctuations, and investors can trade during this stage.
- Return period: After securities enter the market, they begin to enter the return period at some point, and investors can make profits.
How to judge the investment cycle of the stock market?
The length of the investment cycle depends on how long the stock has been on the market and the total number of issuances. At different stages, the market volatility is also different. In some stages, the market volatility is very low, and in other stages, the market volatility is very high. Therefore, investors must first determine the stage at which their strategy is applicable.What are the factors that influence the investment cycle?
Factors affecting the investment cycle include: - Time on the market: The longer a security has been on the market, the higher its value and the lower its volatility.
- Total issuances: The greater the total number of issuances of a security, the greater the volatility.
- Market demand: The stronger the market demand, the higher the volatility.
- Macroeconomic policy: As the market needs macroeconomic policy adjustments such as demand release, financial crisis outbreak, and economic recovery, stock market volatility has also increased.
At what stage of investment are lower-volatility securities appropriate?
Securities with lower volatility are suitable during the following stages: - New stock issuance period: that is, securities that have just been listed have low volatility due to less competition between supply and demand in the market.
- Periods of low volatility: A period in which investors hold a relatively fixed weight on a security, such as shares of a company's common stock.
- Liquidation period: stocks that are financing or in the process of financing have low volatility because the funds are still in the running-in stage.