Understanding the Philosophy of Equity Markets | CORPORATE ETHOS

Understanding the Philosophy of Equity Markets

By: | October 27, 2017
Stock Market philosopy

Some of the billionaires have accumulated their wealth from share investments and many people have lost money as well. Despite the long history of stock markets across the world, it continues to remain a mystery or enigma. The other day Oscar Award winner Resul Pookutty said he doesn’t have any clue about how stock markets operate which is quite acceptable as his profession is related to films. Even financial experts such as former Prime Minister Manmohan Singh himself once said he couldn’t understand the functioning of stock markets.

No wonder, the percentage of the population that trades directly in stock markets remain at a low rate of 3-4% in India. Perhaps, it is the reason why there is more activity taking place in mutual funds and systematic investment plans (SIP) that takes away the headache of investors from tracking stocks, buying and selling.

Here is a look at the philosophy behind the stock markets:

#It’s a Zero Sum Game: In a Zero Sum game some people lose others gain. In stock markets, everyone can’t be winning all the time. Some people will lose at some point of time during which others gain. But if you are consistently losing, either you have to look at your strategy or blame your bad luck!

#It is a valuation market: No fresh capital is raised by stock market.  Even in the case of most Initial Public Offerings (IPOs), promoters offload shares than raise new capital. Stock exchanges only list the shares of companies that are tradeable.  Without a trading mechanism, investor interest in IPOs and the ability of industry to raise capital for expansion will be limited. Once the company is listed, valuation happens every trading day, every minute as new information and buy/sell activities change the perspective of investors towards a stock.

#Stock Market is About Future Profits: Investors look at the potential for future growth in earnings or profit of a company rather than present or past performance.  A company that suffered losses in the past few years can still see their market valuation go up if there is a turnaround and investors see new business and revenue flow for the next few years.

#The Operation of Edge Effect In Stock Market: Edward De Bono who popularised the  Lateral Thinking tools talks about the Edge Effect. It is an initial hurdle in a task or project that doesn’t allow any progress to happen.  A 50-mile journey may not happen if there is a big ditch after a few metres and if it seems to unsurmountable. Likewise, investors are either afraid because they may make losses initially or need to do lot of learning such as fundamental or technical analysis which is like ‘crossing the edge’ or edge effect as propounded by Edward De Bono. Unless, you overcome the edge effect you cannot progress however good your intention would be.

#Stock Markets are Inherently Risky: Just as it is a Zero-Sum game, stock market investments are inherently riskier than other assets such as gold, real estate or tangible properties. This again justifies the advice that you should not use loaned money to trade or money kept for urgent purposes to trade.

#Stock Markets or Indices Do Not Reflect The Health of The Economy: The traded shares only represent 40% of the GDP and more activity happens in a basket of stocks that may come under Nifty or Sensex.  Unless, the traded shares are broad-based covering all sectors of the economy, a bullish trend is not a reflection of buoyancy in the economy.

Last but not the least, stock markets are meant to benefit corporates and brokers than any kind of investors. For corporates, it enhances compliance, accountability and its future growth depends on generating good shareholder value.

(Readers may share their views on the topic to corporateethoslive@gmail.com)