Stock markets, investment and a good society

Stock markets, to some people are often portrayed as casinos. These sentiments are partly informed by news report that often portrays frantic traders speculating on where prices would go next, almost becoming euphoric if the shares have had a good run up (also called a bull market), or thoroughly depressed if the market is down (a bearish market).

Indeed it is fair to say that there are still many people in our societies who regard stock markets as places to make quick money, who spend their lives and money trying to gain short term trading edge over others, not bothering to understand the underlying fundamentals of the business behind the shares.

The image portrayed above is unfortunate because along-side that speculative trader and/or investor, are thousands of value-based investors, (representing retirements and pensions funds, life insurance funds, savers for the future, fund managers, etc), who genuinely try to understand the long term prospects for a company, calculating the intrinsic value for it and then deciding whether to allocate money to the firm to help its growth, expansion, building new factory, make new invents, go into new frontiers, etc.

Through the actions of these value investors, societies benefit from new products, new industries, jobs, wealth creation, etc as money is taken from idle and inefficient activities and reallocated to new frontiers and efficient use.

As one can imagine, through this intermediation process — it is not only the government that benefits from the presence of stock market in its midst —but anyone with savings in a pension scheme, or with a life insurance cover, or with savings/investments with relatively lower returns, etc — who wants a portion of that money placed in shares with prospects of high rates of returns (profits and capital gain) over the next few decades.

To meet these societal needs (i.e. capital/funds to finance businesses and investment opportunities, etc) stock markets have evolved throughout the history, especially in the manner in which they are governed and managed, the manner in which they face and manage increased competitions and also the manner in which they evolve with technological innovations and invents that have changed their method of trading so that their trading and securities depository are now much built around sophisticated computer systems that can handle millions of transactions in a day.

As it is, it makes sense to say every society at this age of human history needs diversified level of investors within itself to facilitate and assist businesses growth through tools of mobilization of savings resources and intermediate them into productive use, especially long term projects and enterprises -- many investors would prefer to have the liquidity and vibrancy that is offered by stock markets than the difficulty of finding buyers when they need to sell off their businesses and shares (or securities) outside the organized market.

On the same vein, a society needs people who are willing to take risks — either in establishing new business ventures, or expanding current businesses to other new territories, or innovation based on ideas or people with the willingness to provide risky funds to new ventures and ideas.

Some financial institutions, by their nature, given their business model and mandates are not willing to accept such risks. Institutions, such as banks — would like to strike deals with companies whereby even if the amount of profits made is small or even in cases where the company makes losses, they still will be paid their interest income on capital advanced to such companies.

Furthermore, such institutions usually require collaterals so that if business plans turnout to be not as expected, the bank can recoup its money by selling off property or other assets held under collateral.

Holders of other forms of debt capital such as bonds, take similar low-risk (but also low-returns) deals.

One can therefore only imagine if debt (short term or long term) were the only form of capital available for businesses to be established or for financing their further growth. Obviously, if debt was only the source of finance, then very few businesses would have been established or flourished in such a situation because it would be rare for entrepreneurs and business managers to come-up with investment projects (i.e. a new venture, a new product-line, etc) that would offer these lenders the security they need or the certainty and predictable returns they require.

Part of the reason why businesses flourish in various uncertain business and economic environment, is because they are also financed by capital whose source recognize that uncertainty and risk taking is part of the business and investment environment. Such fund providers (investors) therefore factors-in such situations in their capital and investment pricing.

It on such bases that the DSE have been pursuing efforts to educate business enterprises to consider using the stock market to access this alternative source of financing, including establishment of the SMEs segment – and now the DSE has introduced the DSE Enterprise Acceleration Program for the purpose of bridging the communication gap between itself and the business community as well as build capacity of SMEs owners/managers to running their businesses in line with the principles of sustainable businesses management.

These are all meant to connect the existence of the stock market with the financing of enterprises and projects for the good of this society.

Stock markets, to some people are often portrayed as casinos. These sentiments are partly informed by news report that often portrays frantic traders speculating on where prices would go next, almost becoming euphoric if the shares have had a good run up (also called a bull market), or thoroughly depressed if the market is down (a bearish market).

Indeed it is fair to say that there are still many people in our societies who regard stock markets as places to make quick money, who spend their lives and money trying to gain short term trading edge over others, not bothering to understand the underlying fundamentals of the business behind the shares.

The image portrayed above is unfortunate because along-side that speculative trader and/or investor, are thousands of value-based investors, (representing retirements and pensions funds, life insurance funds, savers for the future, fund managers, etc), who genuinely try to understand the long term prospects for a company, calculating the intrinsic value for it and then deciding whether to allocate money to the firm to help its growth, expansion, building new factory, make new invents, go into new frontiers, etc.

Through the actions of these value investors, societies benefit from new products, new industries, jobs, wealth creation, etc as money is taken from idle and inefficient activities and reallocated to new frontiers and efficient use.

As one can imagine, through this intermediation process — it is not only the government that benefits from the presence of stock market in its midst —but anyone with savings in a pension scheme, or with a life insurance cover, or with savings/investments with relatively lower returns, etc — who wants a portion of that money placed in shares with prospects of high rates of returns (profits and capital gain) over the next few decades.

To meet these societal needs (i.e. capital/funds to finance businesses and investment opportunities, etc) stock markets have evolved throughout the history, especially in the manner in which they are governed and managed, the manner in which they face and manage increased competitions and also the manner in which they evolve with technological innovations and invents that have changed their method of trading so that their trading and securities depository are now much built around sophisticated computer systems that can handle millions of transactions in a day.

As it is, it makes sense to say every society at this age of human history needs diversified level of investors within itself to facilitate and assist businesses growth through tools of mobilization of savings resources and intermediate them into productive use, especially long term projects and enterprises -- many investors would prefer to have the liquidity and vibrancy that is offered by stock markets than the difficulty of finding buyers when they need to sell off their businesses and shares (or securities) outside the organized market.

On the same vein, a society needs people who are willing to take risks — either in establishing new business ventures, or expanding current businesses to other new territories, or innovation based on ideas or people with the willingness to provide risky funds to new ventures and ideas.

Some financial institutions, by their nature, given their business model and mandates are not willing to accept such risks. Institutions, such as banks — would like to strike deals with companies whereby even if the amount of profits made is small or even in cases where the company makes losses, they still will be paid their interest income on capital advanced to such companies.

Furthermore, such institutions usually require collaterals so that if business plans turnout to be not as expected, the bank can recoup its money by selling off property or other assets held under collateral.

Holders of other forms of debt capital such as bonds, take similar low-risk (but also low-returns) deals.

One can therefore only imagine if debt (short term or long term) were the only form of capital available for businesses to be established or for financing their further growth. Obviously, if debt was only the source of finance, then very few businesses would have been established or flourished in such a situation because it would be rare for entrepreneurs and business managers to come-up with investment projects (i.e. a new venture, a new product-line, etc) that would offer these lenders the security they need or the certainty and predictable returns they require.

Part of the reason why businesses flourish in various uncertain business and economic environment, is because they are also financed by capital whose source recognize that uncertainty and risk taking is part of the business and investment environment.

Such fund providers (investors) therefore factors-in such situations in their capital and investment pricing.

It on such bases that the DSE have been pursuing efforts to educate business enterprises to consider using the stock market to access this alternative source of financing, including establishment of the SMEs segment – and now the DSE has introduced the DSE Enterprise Acceleration Program for the purpose of bridging the communication gap between itself and the business community as well as build capacity of SMEs owners/managers to running their businesses in line with the principles of sustainable businesses management.

These are all meant to connect the existence of the stock market with the financing of enterprises and projects for the good of this society.