Stock market

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Stock Market
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Stock Market

After the advent of banking and the birth of the bond market, the next step in the story of the ascent of money was therefore the rise of the joint-stock, limited-liability corporation: joint-stock because the company’s capital was jointly owned by multiple investors; limited-liability because the separate existence of the company as a legal ‘person’ protected the investors from losing all their wealth if the venture failed. Their liability was limited to the money they had used to buy a stake in the company.

The ability of companies to transform the global economy depended on another, related innovation. In theory, the managers of joint-stock companies are supposed to be disciplined by vigilant shareholders, who attend annual meetings, and seek to exert influence directly or indirectly through non-executive directors. In practice, the primary discipline on companies is exerted by stock markets, where an almost infinite number of small slices of companies (call them stocks, shares or equities, whichever you prefer) are bought and sold every day. In essence, the price people are prepared to pay for a piece of a company tells you how much money they think that company will make in the future. In effect, stock markets hold hourly referendums on the companies whose shares are traded there: on the quality of their management, on the appeal of their products, on prospects of their principal markets.

Yet stock markets also have a life of their own. The future is in large measure uncertain, so our assessments of companies’ future profitability are bound to vary. If we were all calculating machines we would simultaneously process all the available information and come to the same conclusion. But we are human beings, and as such are prone to myopia and to mood swings. When stock market prices surge upwards in sync, as they often do, it is as if investors are gripped by a kind of collective euphoria: what the former chairman of the Federal Reserve Alan Greenspan memorably called irrational exuberance. Conversely, when investors’ ‘animal spirits’ flip from greed to fear, the bubble of their earlier euphoria can burst with amazing suddenness.

Investors these days are said to be an electronic herd, happily grazing on positive returns one moment, then stampeding for the farmyard gate the next. However, the real point is that stock markets are mirrors of the human psyche. Like homo sapiens, they can become depressed. They can even suffer complete breakdowns. Yet hope - or is it amnesia? - always seems able to triumph over such bad experiences.

Invented almost exactly four hundred years ago, the joint-stock, limited-liability company is indeed a miraculous institution, as is the stock market where its ownership can be bought and sold. And yet throughout financial history, there have been crooked companies, just as there have been irrational markets. Indeed the two go hand in hand - for it is when the bulls are stampeding most enthusiastically that people are most likely to get taken for the proverbial ride. A crucial role, however, is nearly always played by central bankers, who are supposed to be the cowboys in control of the herd. Clearly, without his Banque Royale, Law could never have achieved what he did. Equally clearly, without the loose money policy of the Federal Reserve in the 1990s, Ken Lay and Jeff Skilling would have struggled to crank up the price of Enron stock to $90. By contrast, the Great Depression offers a searing lesson in the dangers of excessively restrictive monetary policy during a stock market crash. Avoiding a repeat of the Great Depression is sometimes seen as an end that justifies any means. Yet the history of the Dutch East India Company, the original joint-stock company, shows that, with sound money of the sort provided by the Amsterdam Exchange Bank, stock market bubbles and busts can be avoided.

In the end, the path of financial markets can never be as smooth as we might like. So long as human expectations of the future veer from the over-optimistic to the over-pessimistic - from greed to fear - stock prices will tend to trace an erratic path; indeed, a line not unlike the jagged peaks of the Andes. As an investor, you just have to hope that, when you have to come down from the summit of euphoria, it will be on a smooth ski-slope and not over a sheer cliff.

But is there nothing we can do to protect ourselves from real and metaphorical falls? The evolution of insurance, from humble eighteenth-century beginnings, has created a range of answers to that question, each of which offers at least some protection from the sheer cliffs and fat tails of financial history.

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What Is a Large Cap (Big Cap) Stock? Definition and How to Invest https://www.investopedia.com/terms/l/large-cap.asp
Why Stock Indexes Matter to Your Investments - https://www.sofi.com/article/economy-markets/deep-dive-20241211/
Should You Worry When Insiders Sell Their Shares? Here’s How To Find Out: https://www.investopedia.com/when-insiders-sell-their-shares-11699289

Stock Market

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