Live trapped mass of thinking?

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Three sources of fair competition

Find a spot transactions in the securities market as part of the institutional approach, it is possible to determine the composition of the stock rynka3 costs. For this we find the place where the stock market deviates from perfect competition.

Prerequisites competitive market:
- Complete and perfect information;
- Complete the definition of property rights;
- Complete rationality of economic agents.

These three points at their absolute respect for the health and fair competition in the market, ie if all these assumptions theoretically investors generally do not face transaction costs!

1. Speaking about the completeness and perfection of information, we mean easy access to all the information flows that describe the state of the market.
It is clear that even in a full disclosure of qualitative characteristics of the goods (quarterly reports of public companies), some uncertainty in the market will still exist. This is due to a very strong relationship with other processes in the economy. However, the uncertainty about the future, so in the absence of insiders in the market (and there are not that much compared to the total volume of transactions) for each second of investors are fully informed about what is happening.

The fact that a self-fulfilling predictions, also favor if not completely, then at least a very high awareness of members in trade relations.

2. Definition of property rights in the securities market is a technical problem more than a legal or power.
As trade in such a market is paperless goods, and transactions are recorded in the register only depository, the definition of property rights fully in the professional market, whose competence and authority, fixed license FSC, just do not involve misconduct.

3. Under the rationality of economic agents usually means their ability to clearly identify and structure their preferences and make the right decisions optimally. In this case, the non-rationality in behavior for each investor means a deviation from the pre-planned investment strategy (even if now, this strategy makes less and still have the opportunity to reduce losses). When shown irrational? Usually, the stock market is very developed psychological impact factor, which leads to the fact that investors are starting to ignore the pre-designed optimal strategy and to act effectively, operating at a loss.

With less scared to go home

It turns out that the technical characteristics of the stock market is very close to perfectly competitive. And ALL incidental expenses investors are their own fault. And to define such alternative losses on the stock market is much easier than in the rest of the economy.

The investor takes a position to buy stocks and watches the market, which suddenly begins to fall. Investor already has a loss of $ 200, but, nevertheless, he believes in the truth of his predictions and does not leave the market, and within three minutes of his loss is $ 1,000, and with the net at all scared to come home!

And investors all day waiting for the same price at last, walk up the expanses of the adjusted rate, even for a second return to the previous level. Five hours later, this option will appear, and the investor closes the position with zero result, or even a small profit.

At first glance, this situation seems to be that the actions of traders make sense and quite rational. But in the five hours he could fix a loss of $ 200, buy another financial instrument, and to continue to trade on it already, and win back the lost money to make substantial capital gains! 4 model of investor behavior in this case can be represented by an array of alternative actions.

If you do not take into account transaction costs, for the player, there is only one position of the four in which it makes a loss. All other strategies of logically justified: <Loss of - better capital loss> 5.

But as soon as we enter into the analysis of the concept of transaction costs and try to measure them quantitatively, the difference between the errors of the first and second kind is erased. In two out of four cases the investor goes into negative. Securities market does not tolerate the subjunctive mood. Talk about past failures or victories - to live in a trap mass thinking. The only weapon against it - an exact calculation and following strategy. In conjunction with the institutional analysis it can give very good results.

Footnotes:
1 Of course, we are not talking about a conversation at an oval table and a demonstration of its power to suppress the greedy ambitions of the counterparty.
However, institutional investors may <afloat> In times of recession and corrections significantly longer than their smaller private competitors by diversifying the investment.
2 This scale can take place in the division for those who want to buy, and those who want to sell.
3 Missing here is the cost of opening and maintaining accounts, brokerage fee, the cost of communication services (hard to count them)
case of transaction costs, which are designed to reflect normal market imperfection market structure.