How the stock market works. ( Archived) (2)

Once upon a time, a man appeared in a village and announced to the villagers that he would buy monkeys for €10 each. The villagers, seeing that there were lots of monkeys around, went out into the forest and started catching as many as they could, and the man bought thousands of monkeys at €10 each.

As supply started to diminish and villagers slowed down their efforts, he announced that now he would buy monkeys at €20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further, and people started going back to their farms. The offer rate increased to €25 each, and the supply of monkeys became so low that it was difficult to even see a monkey, let alone catch one. So of course, our man now declared that he would buy monkeys at €50 each.

However, he suddenly had to go to the city on some urgent business, so he announced that his assistant would now buy monkeys on his behalf.

Once the man had gone, his assistant told the villagers, "Look at all
these monkeys collected by my boss in that big cage! I will sell them to you at R€35 each, and when he comes back, you can sell them back to him for €50 each."

Naturally, the villagers queued up with all their savings to buy monkeys at a throw-away price of €35 each, when the market rate was €50 each.