All but forgotten

Many of us are transfixed by the stock market, perhaps a bit like buying lottery tickets as a way to fortune.

The stock market’s moves are reported on the nightly news broadcasts; the Business News Network, which runs 24 hours a day, focuses mainly on the equity market.

With all this coverage, it is easy to forget what the main functions of the stock market are supposed to be. Clearly, they have been forgotten.

At the moment the stock market seems to be a form of gambling casino, virtually nothing to do with economic reality. How could it be otherwise when, according to the latest data, the average holding of an equity position is just a few seconds?

The volume on stock exchanges has soared to an almost unmanageable extent. A few decades ago, some three to four million shares were traded each day. On the day of the great crash in 1929 volume peaked at 16 million shares and reports of the days prices on the ticker tape were running hours late.

Nowadays, a typical daily volume is around 700 million shares.

What is going on is the buying and selling of shares for a minute percentage move. To capitalize on a slight misalignment of a price, “experts” use computers to try to gain only the smallest fraction of change.

The activist shareholder speculator is increasingly motivated by trading activity. This has been fueled further by companies’ quarterly reports and “guidance” by management on the immediate outlook. Hence, attention is focused on the most short-term goals rather than long-term planning.

In place of this nonsense, it should be recognized that the principal concern of the stock market should be to permit participation in economic growth as reflected in share prices, linking savings to business profits.

Also, the market is supposed to allocate capital to further long-term growth. Thus, the daily movements of the stock market have nothing to do with those roles making a mockery of the real reasons for the stock market.

Efforts have been made to increase the focus on different objectives with tax rates reduced for longer term holdings, but nothing has been modified.

As a result, companies more and more are ignoring the stock market and raising capital through banks or private lenders. As stocks now are mainly owned by private fund managers who are judged by the most short-term considerations; their performance is measured by the market’s index.

Stock exchanges certainly like the big trading volume, but the public would benefit if investors’ perspectives were different.

According to a summary in The Economist, “Above all, it would help to remember that the stock market serves a wider goal. It is not supposed to be a sophisticated version of the National Lottery.”

 

 

Bruce Whitestone

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