What are The Markets?

Published by Sergey Kiklevich on

In the table below there are a few of the main components that make up our capital markets system and economy. If you want to understand how the markets work and to be better prepared to face any economic conditions, please follow my future posts about this topic and don’t be shy to reach out and ask questions. I’d love to share my “inside of the markets experience” with the curious and interested people.

When I sat down to think about it [the topic of the markets], soooo many things started popping in my mind, so I did my best to organize them: I grouped them into “columns of three” and organized them by relevance and similarity of concepts.

MoneyPricingTradingDebtLeverageAsset
CapitalAnalysisInvestingEquityVolatilityLiability
CreditValuationBankingInterestRisk/RewardInsurance
Some of the key components of “The Markets” (Gambit Solutions Inc., Copyright, 2020)

Important Note: each concept (in the table above) requires being studied and understood on its own first. Then you can start putting them together in clusters (pairings of 3) to better understand the bigger picture and how they integrate with each other. Then you can better understand the segments and how they make up the capital markets system overall. How all of these things and of course people that work in those fields come together to make up a highly complex, intelligent, effective, and yet irrational-at-times system called The Markets. We, the people, are what makes markets irrational in my opinion. That leads me to my favorite topic of Behavioral Finance. We’ll save this topic for a later discussion.

Many may argue with my point of view about The Markets being irrational [at times]. I understand. I am also aware that there are other views out there, I’ve also studied and learned from them. Classical Supply and Demand, efficient pricing model/theory, Keynesian economics are all important to look at as they all have very good elements that help us understand The Markets better. And rightfully so, as there should be more than just one or two schools of thought about such a complex subject. So my Behavioral Finance approach to business and economics is my way of adding to this field with a new perspective and view. I’ll refer to it as the “Gambit Theory”.

I like to think about my ideas, views, and thoughts about The Markets more from a human perspective. The Markets are first of all social “organisms” or, better said, “mechanisms” in which people have to interact with each other and make trades and tradeoffs every single day. Inside of the markets, people have to account for every bit of major and minor news and developments around the globe and THEN make bets. To better understand The Markets we need to go way back in history and review the concept of a “barter economy”, where trading one good or service for another was what made up the market. It was a simple trade or exchange of goods and services. Then money and gold became the new standard of payment for goods and services. And then in 1971, under Richard Nixon, the U.S. dollar was decoupled from gold and FIAT MONEY became the new standard of payment and still is. Today, however, the number of different money instruments, financial securities, and investment products can easily overwhelm even a financially savvy mind. But don’t worry, we’ll get through this. All you need to remember for now is that TRADE is key to any and every market.

Trade by its very nature involves some form of negotiation. When it comes to people, negotiation almost always involves emotions, and that’s where things become irrational. You don’t have to take my word for it, check out the work of the Nobel Prize Winner in economics, a psychologist (that’s right a !psychologist! won the prize in economics!!!) Daniel Kahneman. According to Daniel, “people often make decisions using rules of thumb rather than rational analysis. His findings countered some assumptions of traditional economic theory–that people make rational choices based on their self-interest”. (by Deborah Smith, Monitor, December 2002, Vol 33, No. 11, page 22). So yes, we are emotional beings first, rational second. And that’s why The Markets become irrational at times, and we are witnessing it right now during this COVID-19 global pandemic.

Some Human Emotions

I’ve witnessed and experienced the markets from within too. So, my ideas are not only academic or theoretical in nature; they are a hybrid of everything, including the experiences of people that I had a pleasure and honor to work and interact with over nearly 9 years at my investment bank.

If the markets were rational – they would be always efficiently priced, and we know for a fact that it’s not true. At least not all the time. That’s why there’s always money to be made in The Markets, no matter if the markets are up or down; someone is ALWAYS making money, while someone else on the other side of the trade is losing money.

For a trader in The Markets, for example, volatility is key. The higher the volatility [how much up and down daily prices fluctuate and what type of volume (dollars) are trading], the more money is to be made for everyone trading, speculating, and investing.

Trading Example

You’re probably thinking, how come I’m not making any money in The Markets??? Well, that means that you need to start learning and practicing your knowledge. From the table above, you can at least read up on each topic individually, watch youtube videos, research the free resources of the internet and/or hire people like myself to teach you in order to expedite the experience and process. The choice is always yours. What’s important is to start doing something about it, TODAY!

If you want to understand The Markets and learn how they work, so that you can benefit from them too, simply start by exploring the free resources (Investopedia, Wikipedia, Forbes, Wall Street Journal, the Economist, Bloomberg, CNBC, Yahoo Finance, Google Finance, etc.) and get knowledgeable on the topics I listed in the table above. I’m happy to post about each of these topics. Please let me know in the comments if you’d like me to start a series of posts (or podcasts/videos) about “The Markets.” Maybe you have a special request or a particular topic is really intriguing to you. Whatever it is, please let me know in the comments or directly at askus@askgambit.com.

Sincerely,

The Gambit

Ⓒ 2020 Gambit Solutions Inc. All Rights Reserved.