The way that markets work can be explained using the analogy of sports betting. In Las Vegas, when you bet on a team, you cannot bet $100 to get $100 -- a straight up bet on who will win the game. Instead, the casino will either pay out at a different ratio or offer a bet on the point spread. The point spread basically means that the favored team must win by more than that spread for the bet to pay out. If you are betting on an NFL football game and the point spread is 3.5 points, you would lose that bet if the favored team wins but only by a three-point field goal. Think of it like playing a game of basketball with a younger sibling and spotting them a three-point handicap to make the game more even. If set fairly, that handicap would give you both an equal opportunity to win. Relating this back to the markets, stock prices function similarly to a point spread. At its essence, a stock’s price is the price at which a buyer and a seller agree to transact because the buyer believ...
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