The original intent of setting up a stock market is to provide a source for companies to raise funds. It is a place where companies can sell some of their shares to raise funds from the investing public. Another feature of the stock market is it provides liquidity to the investors.
Unlike properties, where investors need to wait for months at end to complete the process of selling a property from putting up the property for sale to signing the Sales and Purchase Agreement.
The stock market enables investors to complete a deal within days and hence can be considered quite liquid.
Another thing about the Stock Market is that it is somehow curiously linked to the real economy. It is said that the Stock Market is a barometer for things to come in the real economy. A rising stock market is presumably be followed by a strengthening of the economy and hence the public perception or confidence towards the economy and government. Rising stock markets also gives the perception that businesses will tend to invest more on plant and machinery.
Hence, the stock market has become an important tool for the authorities to influence the public mood and confidence since it is closely tied to the wealth effect of households and its consumption pattern. So it is not a surprise to see massive central banks intervention in the stock markets around the globe. How they control the stock markets?
Plunge Protection Team
The Plunge Protection Team normally are normally made up of private individuals from the investment banks, hedge funds and etc and regulators from the powers to be. For example in the U.S. the Plunge Protection Team or the President’s Working Group on Financial Markets (PWG) which comprises mostly of hedge fund managers. Its mission is to ‘develop and publicly release best practices so that market participants may enhance investor protection and systemic risk safeguards consistent with PWG principles and guidelines’. The committees are mostly from the hedge funds industry and they are,
1 Eric Mindich, Chair, Eton Park Capital Management
2 Anne Casscells. AETOS Capital, LLC
3 James S. Chanos, Kynikos Associates LP
4 Anne Dinning, D. E. Shaw & Co., L.P.
5 Jonathon S. Jacobson, Highfields Capital Management
6 Marc Lasry,Avenue Capital Group
7 Edward A. Mulé, Silver Point Capital
8 Daniel S. Och, Och-Ziff Capital Management
9 Daniel H. Stern, Reservoir Capital Group
10 William Von Mueffling, Cantillon Capital
11 Michael Vranos, Ellington Management Group LLC
Getting people from the funds industry to head the Plunge Protection Team is like getting a fox to look after the chicken coop. Just wondered who are they going to bailout first (themselves or millions of folks out there) when the next crisis strikes.
In actual fact the main purpose of the Plunge Protection Team is to stabilize or rescue the financial markets when it is poised for a huge takedown or crash. They will stabilize the market so that investors will not get too worried or fear that the market is going to crash.
Controlling the Money Supply
The authorities in the Central Banks can control movements in the stock markets by manipulating the amount of money going in and coming out of the stock markets. They can use what we call the ‘Tight and Loose Money’ policies.
By tight money, we meant by contractionary monetary policy whereby the authorities reduces the amount of money in circulation. As a result there will be less money available for speculation and investment and hence will cool down the stock market and economy.
By loose money, it will be the opposite where the authorities will implement expansionary monetary policies through reduction in interest rates and hence more money is available for speculation and investment.
Management enriching themselves
As a result of such manipulations, the stock market is no longer what it used to be. The New Stock Market as it is called now has become more profit oriented and member companies treat it like a profit center other than a source to raise funds. For example there are many cases minority investors are being taken for a ride by the major shareholders and the management of the listed companies.
As a result of the fragmented ownership of the shares of the company, the management of the company are normally left to the management team. Instead of doing everything they can for the benefit of the shareholders they will do everything to enrich themselves because they are the ones that will determine the destiny of the company.
Other than this, major shareholders will also tend to overvalue their stocks. Corporations also need an overvaluation of the stockvalue. The reason being most of the executives wealth are tied to their stock holdings in the company either through Employee Stock Option Scheme (ESOS) and Stock splits. So it is not in their interest to have a beat down stock value. Corporate head honchos don’t make most of their money by increasing the sales of their company year on year or by churning out new products every now and then. They make most of their money by increasing or ‘Pump Priming’ the value of their company stocks. When their stock valuation reached obscene levels they will cash out in no time and often leaving uninformed shareholders in the lurch.
Stock Marketing Campaign by Companies
So how do the managers Market their Companies ? One of their best Marketing Strategy is to treat the Share Market like a Super Market. Why do say this? Take a look at the following and judge it by yourself and tell me whether there is any difference the way they run the Stock Market and a Super Market?
|Super Market||Stock Market|
|Buy 2 Free 1||Stock Split 2:1|
|End of Year Sale||End of Year House Keeping|
|Cheap and Good||Junk or Penny Stock|
|Less fat and more lean||After Restructuring|
|Good quality and can last for years||Blue Chips with potential|
|Latest products with improved formula||New issues with potential|
|Value for Money||Bonus Issue 1:1|
|Clearance Sale||Stocks Rebalancing|
|New Arrival||New Listing|
|Product with potential||Undervalue Asset|
|Guarantee to last||No downside risk|
|Products on Offer||Oversold|
|Rated best in its class||AAA ratings|
|Clinically tested and proven||Research Dept analyzed and recommended|
|Easy to use - just follow instructions||Easy to open an account - Just sign here|
|Earn 3x points with credit card||Only 3% charge on Margin Account|
|Incredibly low price||Penny stock about to bust|
|Once in a lifetime oppurtunity||Limited downside and unlimited upside|
|Warehouse Sale||Market Crash|
|Only 3 left||Buy now or never|
Lessons to Learn
1. So, the above are just some of the ways to make us believe that the stock market is always undervalue and sold at bargain prices. Hence overvaluation in the stock market is justified. Another good lesson to learn from this is that a lot of investors are blindly lead to the believe that Dividend Paying stocks are always good stocks. Think twice folks, I haven’t heard of many companies that operate just for the benefit of the minority share holders. By declaring dividends, the companies automatically made the stock cheap after their ex-date and hence increase their marketability.
2. Another trick that we need to be careful is that some companies either reduce or cancels the dividends and sometimes the dividend might be the last one they will ever announce. So investors that are hoping for a company that will continuously pay dividends will be in for a surprise.
3. The same goes for stock splits and bonus issue, it is another way of making the stocks more appealing to the public. This is because buying a stock worth $200 a share looks cheap after a 10:1 split which bring the value down to $20 a share., although it is still the same old original $200 a share.
4. Another tactic they use to help them market their stocks after the announcement of the news on dividend or bonus issue is to collaborate with market makers to 'Push Up' their shares. What the market makers do is to play up the stock value as if there is no end to its rise. They are able to create an atmosphere where the new price seems like a new plateau for the stock. As soon as after the ex-date, the market makers who all the while have been buyers turned sellers. Needless to say the stock plunge and the minority or retail investors will be left holding the bag.
So next time a stock jobber tells you this and that about a stock, we just have to be careful and the best will be to do a background check on the company and its management..