Monkey and The Stock Market Story
If you’ve been wondering how the stock markets work, here is a popular story of buying and selling monkeys that draws an analogy on the stock market. Though this is just a fable, it is not very far from reality when it comes to the style of functioning of today’s markets:
Once a man appeared in a village and announced that he wanted to buy monkeys for $10 each. The villagers, realizing that there was no dearth
of monkeys in the nearby forest, went out and started catching them. The
man bought thousands of monkeys at $10. As supply started to fall down,
the villagers stopped catching more monkeys.
Now the man further announced that he would now buy monkeys at $20
each. This renewed the efforts of the villagers and they started
catching monkeys again. As the supply diminished even further, people
once again stopped catching monkeys and started going back to their
farms.
The man further increased the rate to $25. Soon the supply of monkeys
became so little that it was quite an effort to even get a glimpse of a
monkey, let alone catch it!
The man now announced that he would buy monkeys at $50. However,
since he had to go to the city on some business, his assistant would now
buy on behalf of him.
In the absence of the man, the assistant said to the villagers: “Look
at all these monkeys in the big cage that the man has collected. I will
sell them to you at $35 each and when the man returns from the city,
you can sell them to him for $50.”
The villagers squeezed up with all their savings and bought all the
monkeys. But they never ever saw the man or his assistant again in the
village; only monkeys everywhere!
Welcome to the Stock Market!
An
average small investor looks at the stock markets and is encouraged
when he sees the indices and individual company shares are going up.
Foreign Institutional Investors are investing as the prices are
attractive. He also starts buying. He can only buy small quantities. A
small fish in the ocean of big fish, very big fish and whales. When
samll investors enter the market, the index raises even further.
Individually he is small but collectively it is considerable
investments. But he will discover shortly that the stocks he purchased
have started falling even if others are rising. Rising was in units but
fall is in tens. Then suddenly FIIs start selling. Before he realises
and reacts, the shares have fallen steeply and the index has collapsed.
At a time when he exits the market he has already lost a large part of
his money.
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Harsh Dixit.
MBA | MFA
Trader | Investor | Trainer | Mentor
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