Is the Stock Exchange a fraud? – or the knowledge we have around it, lacking?
Tsonos George is writing…
The stock markets are an economic institution that nowadays many people do not fully understand how it works, you may have been in a personal discussion on the subject of these markets and a common view is that the markets are like gambling. There are many stock markets around the world such as in Greece the Athens Stock Exchange (ATHEX). But how can someone who invests their money in these markets make a profit or loss and why are stock markets considered by many to be a scam or a gamble?
In the securities exchanges wholesale, shares of ownership of companies (stocks) are exchanged in which since a company is listed on the stock exchange and therefore its shares are publicly traded, they can be bought even by an ordinary consumer. These shares have a certain value which is initially determined by the company that issues them and then their price is subject to the forces of supply and demand, i.e. the more people who wish to buy a company’s shares, the more the price of the shares will rise accordingly as the quantity of shares in circulation decreases and therefore the demand exceeds the supply for the new smaller number of shares thus contributing to this rise. The main way in which gains are achieved through shares is Capital Gains which arise from the increase in the value of the asset (share) mentioned earlier, i.e. it is the difference between the new higher value of the share and the price at which it was purchased. A further way in which profits are made from holding shares is through a dividend, which is calculated according to the amount of shares you own and the percentage of profit the company will distribute. These are some basic reasons for one to be involved in buying and selling shares because by having knowledge of basic finance, a full understanding of the risk which will be discussed below and regular updates one can make safe investments and make a real profit.
In order to capture the risk associated with buying and selling shares, the risks faced by the market must be mentioned as it is affected by multiple factors. The market nowadays is characterized by high volatility due to various causes (Pandemic, Financial crisis, Inflation etc.) which can upset a plethora of speculative organizations and put investors’ funds at risk. Also a phenomenon that creates uncertainty in the market is Headline Risk, which defines that several market movements can be determined by social media, news and other media. Giving an example of Headline Risk, we can think about the impact that a negative media disclosure would have on a company and its interested investors.
Considering the risks of the market, it can be concluded that if there is not enough understanding by an interested amateur investor, his entry into the market entails losses to the capital he will allocate. It is this phenomenon that leads people to the conclusion that shares are seen as just another game of chance when in fact, it is an institution that needs an understanding of the businesses involved as well as financial knowledge in order to be exploited.
To sum up, the stock market is a market like any other except that the subject of trading is the securities of companies and other financial products. In order for a capital to be invested by someone with insufficient knowledge of the market, it is advisable that the portfolio be managed by a certified investment advisor who is an expert in the market and in handling various financial situations. Investments should be made responsibly and after an analysis of the potential risk.
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