Reminder – Why Stock Markets Exists

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The Ability to Raise Capital

  • Companies raise capital by offering an ownership stake to the public through the offerings of shares in their business’ success. In return, they can raise capital to fund new projects. This enables them to pursue ventures which might otherwise be impossible.

    This capital infusion from the public allows businesses to expand and engage in ambitious projects, hopefully innovating in a way that benefits the lives of the people inclined to participate.

Opportunities for The Public

  • Investors can buy shares in companies and become partial owners, participating in corporate outcomes, and hopefully profiting as a result. The alternative being, starting their own businesses which may not be suitable for many.

Liquidity

  • The market provides a platform for quickly buying and selling stakes in businesses, giving investors flexibility, and making them more comfortable taking on business risk.

Imagine a world where the only way to participate in the success of a business requires a large financial expenditure, where the expenditure could not be reclaimed for many years. This would stifle business ventures and dissuade investment.

Pricing Consensus

  • The market helps set prices based on supply and demand, allowing for relatively accurate pricing of asset values. The opinion of many market participants tends to lead to a consensus on the true value of things and encourages participation.

If you’ve ever purchased a home, you understand that the price of comparable houses in the same area will likely cost a similar amount to the neighboring property. This is market consensus – The same general idea.

High Frequency Trading – No Thank You, Goodbye

  • High-frequency trading is a type of techno market strategy that uses complex algorithms to execute a large number of trades at an extremely rapid pace. This practice does not take into consideration the value of businesses. Rather, it exploits momentary pricing inefficiencies created by market volatility. It defiles the intended purpose of a functional market by extracting profit without participating in business ownership, providing capital, or pricing consensus.

Why Should You Care?

During periods of high volatility, it is important to remember that what a healthy market is doing is usually productive. Markets play a vital role in public economic prosperity. The ability to easily own portions of corporate profits is a tremendous boon to wealth creation. The agility to easily buy and sell securities (liquidity) is essential for public participation in investment activity.

A wise man once said to me: Be patient. Investing isn’t about going hunting, it’s about growing a garden.

Peacefully, Zac

The information in this post was written by S. Zachary Fineberg, CFP(r) Managing Member of Fineberg Wealth Management, LLC, a registered investment advisor. If you would like to schedule a consultation to discuss how Fineberg Wealth Management can help you reach your long-term financial goals, please make contact to discuss.

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