Why the hell do we need the stock markets?

The other day someone asked me (innocently) - "Why the hell do we need the stock markets, anyway?"

This was a hard working man who came to Canada in search of a better life. He had worked his way up from $3/hour to owning a few taxi cabs, sent his kids to a decent school and was now settled in a respectable immigrant-dominated locality. When he learnt the industry I operate in, he did not hold back. Losing money is tough. The question stayed with me though. I will try to reasonably oversimplify. By the way, by stock market I mean all the regulators, exchanges, depositories, clearing and settlement organizations, brokers ... blah blah blah 

Money Money... Money Money...
If you run a business, sooner or later you will need money that you don't have. Where would you get that money? Family? Bank? Other personal/professional lenders? Eventually, by choice or by a natural turn of events, you will want others to share the risk. If your business is successful others might want 'in'. Wouldn't it be nice if you could just walk into a building and get money or invest money (in a secure, informed and somewhat fair manner)? The Stock Market is that building. 

What are you really worth?
(Depending on supply and demand) 500ml of drinking water can be valued from free to few cents to a fistful of dollars. Same holds for companies (via their floating shares). Efficient or not, the stock markets offer a good 'avenue' for discussing and deciding the true worth of companies.

Quantified crowd-sourcing
Everybody has different information based on their sources and hence different opinions. 
How good is the good news that just came in? Are people reacting or over-reacting? What's the impact of a revolution in a country 1000s of kms away? Does the company deserve to trade at 'such' a premium (or a discount)?
...the stock market forces all of us to quantify our opinion.

Tame the dragon
Markets bring in a lot of rules, regulation, audit, transparency (and paperwork)... which means

- it is tough for companies to hide if they didn't have the quarter they expected to 
- if you bought a few shares, you will get them
- if you got into a contract to sell shares (or even bags of rice) at a certain price and at a certain date, the risk of the 'other party' backing out is removed
- it will be tough for small groups of people to 'influence' a stock 

I am sure a lot of people couldn't care less. They'd rather flip the channel on crisply- dressed-analysts rather than watch them predict the future. I have always felt, if you are not into it - stay away from it. Unlike real life - it is a zero sum game and that's one of the reasons why I absolutely love it. 

2 comments:

  1. The markets are often confused with a casino, a place where people get rich. Your thoughts focus on the true nature of the markets, a place to gather assets to invest in companies. Certainly investors hope to get a return, but it is society overall that gains benefits from goods and services that are available because of money gathered through the markets. Now about those who manipulate markets for their own benefit...

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  2. Thank you for commenting Scott. Casino is a good analogy. A lot of people try to make a quick buck based on hearsay (or some irrelevant random tip). The guy I mentioned in my post also had a similar story. He asked me why doesn't the Government shut the markets down if they are creating such a nuisance (2008 story) :)

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