Stocks which drop in price are relegated out of the index (or the companies are wound up) as their market caps fall. Either way, new companies with larger market caps are inducted into the index so it always looks like stocks are a one-way bet.
is market random?
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Stocks which drop in price are relegated out of the index (or the companies are wound up) as their market caps fall. Either way, new companies with larger market caps are inducted into the index so it always looks like stocks are a one-way bet.
Anyway, depends what is meant by random, and what is meant by market.
Even an unlikely outcome from an event can be used to make profit. Like the definition of prevailing wind - south-west where I live. This does not mean wind that blows most of the time from the SW, it means wind here blows more often from the SW than from any ONE of the other directions, not ALL of the other directions combined. That doesn't make it totally random either.
Even an unlikely outcome from an event can be used to make profit. Like the definition of prevailing wind - south-west where I live. This does not mean wind that blows most of the time from the SW, it means wind here blows more often from the SW than from any ONE of the other directions, not ALL of the other directions combined. That doesn't make it totally random either.
Futures decisions on the markets by all participants are unpredictable ( a random component, the free will of any sentient being ) but the key here is the actual general market trend is possible to read it through statistics and it keeps certain inertia until it changes once again. It's just a pragmatic thought to profit.
no its not random, can be choppy yes. This choppiness is what a lot of people define as random, the lower the time frame the more choppy it is
Absolutely. We don't have to be right every time or right for ever. Just often enough and for long enough to make some money.
Taking this literally, in the case of trends, there are only so many things price in an established trend will do next -
continue
pull back and then continue
consolidate and then continue
range
consolidate and then reverse
reverse
The most likely is continue: even more so when combined with initial pull-back or consolidation. So its only necessary to be a little bit right for a limited time.
The least likely next occurrence (but most dramatic) is reverse.
No. You are conflating nominal price movements with real price movements.
The market has moved up by [{nominal-real} + real] over time.
If general (U.S.) inflation has averaged 3%-4% over time, and the market has grown ~10% over time, what was the real return?
"Yeahhhhhh -- that's the ticket."
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The BS pricing model is not based on the binomial distribution and neither does an unfair coin in any way represent asset price paths. One can use the binomial model to price an option, in reality do practitioners very rarely if ever use the binomial model. It is used, as you correctly stated, in undergrad classes to make students understand the absolute basics. An unfair coin displays a strong trend in one direction only and at best may only with a very specific bias parameter remotely represent stock price paths, though even that poorly. If your professors used a biased coin toss to explain any financial asset price paths then may I please refer you to CMU's MSCF program.
Sure, and instead of thinking to replace one unfair coin with another one during tosses it makes a million times more sense to start with a much better function that better describes asset price moves than a binomial or coin toss. That was actually my point. Coin tosses and binomial distributions make students understand the discrete math behind derivatives pricing but continuous pricing is an entirely different animal.