|
|
PACHINKO and the WORLD
OF STOCKS
|
|
PART II
|
Imagine the ball being the value of the stock. Everytime a nail
is hit, the stock value - due to some random transactions - gets a kick, a percentage
change. It could be a rise or a fall - completely randomly. The average size of the
kick is called - in financial terms - volatility.
The
time between the rows of nails is just the time interval between these fluctuations.
The final position of the ball - the bin it's ending up in - corresponds to the stock's
value after all the fluctuations took place. If it went to the right the stock price
went up, if the ball ends up in a bin left to the center, this means the stock was falling.
|
There is no way
you can predict the final value of the stock. But trying out the random
walk many times you can determine the probability of the stock having
a specific value in the end.
|
| Option Pricing is based on
Probabilities
- NOT on one specific outcome. |
|
|
|
And what if I have
bad luck?
|
|
There is no guarantee for
not losing money. Only, if you invest many times (many attempts in
the Pachinko game) you will break even - at the level of statistics.
Of course, if you think you know the evolution of the stock prices
better than the market prices suggest or - much more likely - if you
have some luck, you can make money.
|
|