The Intended Purpose of the Stock Market





The Intended Purpose of the Stock Market 



By E. Stanley Ukeni

In response to pointed question by a Chinese investor, during the Berkshire Hathaway annual shareholder’s meeting on Saturday, the 6th of May, 2017, the oracle of Omaha, Warren Buffett, suggested that some investor—most often unseasoned investors, treat the stock market as if it’s a gambling house, when he was asked about the volatility in the Chinese stock market.

“Markets have a casino characteristic that has a lot of appeal to people—particularly when they see people getting rich around them,” Warren Buffett retorts. “And those who haven’t been through cycles before are more prone to speculate than people who have experienced the outcome of wild speculation.”

Mr. Buffett continued, “If the market gets hot and people on leverage are doing well, a lot of people will be attracted not only to what I call speculation but what I call gambling.”
“…there’s nothing more agonizing than to see your neighbor who you think has an IQ 30 points below you getting rich buying stocks,” Mr. Buffett joked.

His sage remark got me thinking about the original intent and purpose of the stock market and how, over the years, novel idea of aggregating capital to where it is needed in other to fund business expansion and innovations has been eclipsed by the lure of greed and avarice.
So I thought it’d be interesting to explore the genesis and original purpose, and the exploitative evolution, of the stock market.

I would describe the stock market as equity trading platform where individuals can invest some of their wealth towards providing needed financial liquidity for businesses to grow and expand, and at the same time, for these capital investors to be able to profit from their investment in the ingenuity and productivity of these companies. 

I am of the opinion that the primary aim of this equity trading platform is to encourage business diversity and innovation through capital investment incentives. The financial incentive serves a secondary purpose of encouraging businesses to continue to innovate and improve productivity.

The resultant effects—in the form of efficiency, innovations or inventions, of the funding provided by investors are meant to improve corporate profitability—thereby increasing the company’s valuation, and as a consequence, the value of the investor’s equity position in the business.  

On a much broader socioeconomic prospective, the stock market serves as a medium for the working class to grow their hard earned savings, with the promise of enhancing their financial position in the future, by investing their funds in perceived lucrative enterprises—and being able to leverage their equity positions for higher financial reward.

This helps maintain a dynamic consumer middle class needed to keep an economy vibrant. Investing in the stock market also incentivizes the workforce to focus on their unique expertise, thus eliminating the financial motivation for key professionals venture into saturated sectors of an economy where they deem more financially lucrative—thereby causing an unintended deficit in requisite sectors of society where their particular expertise are most needful.

In essence, the stock market was envisaged as an avenue for the average member of society to profit from the growth sector of the economy, without their having to abandon their profession to do so—ensuring that the productive population of society, who are willing to leverage a portion of their earnings, enjoy a relatively high standard of living.

The stock market works well under a strict free enterprise system. However, when the stock market is allowed by government regulators to be turned into a de facto gambling casino by stockbrokers, fund managers and regular investors then the equity trading platforms becomes a mere speculative instrument—which would eventually crash under the weight of the irrational exuberance of speculators.

The ensuing social and financial crisis that will be caused by a major stock market crash would undoubtedly systematically undermine social cohesiveness, leading to a decline standard of living and quality of life.    

Of course, some will argue that this is a simplistic view of the stock market…perhaps insisting that the stock market has long evolved into an instrument for political systems to maintain economic primacy in global trade and commerce. Sure, there is truth to this notion, but this is not the topic of this article.

In closing, I’d like to proffer a warning that the current distorting of stock prices, by unscrupulous investors, who are hell-bent on manipulating stock valuations for selfish ends, might inadvertently catalyze a stock market collapse, in the not too distant future.      



Authored by E. Stanley Ukeni, © 2017. All Rights Reserved. This material and other articles or stories posted on this blog site may not be reproduced, published, broadcast, rewritten or redistributed, in whole or in part, without prior expressed written permission from the author, E. Stanley Ukeni.
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Photo Credits: Berkshire Hathaway; 

Comments

  1. Insightful article Stanley. I for one have observed situations in past years of startup companies manipulating the value of their companies to drive the stock up, so I'm sure it's done with larger companies.

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