![]() ![]() The stock market tug-of-war in January was thus a confrontation between two speculative moves. The purpose of investing in the stock market To speculate is merely to bet on which way a share price is heading, whatever the estimated value. But alongside this primary process, more "speculative" practices have developed - although there is no need to associate speculation with questionable moral standards. Both help bring share prices closer to their "real" value. They then either buy or sell the company's stock if they see that the market price has deviated too sharply from their estimate.įor that reason, short positions (i.e., borrow-and-sell positions) are no less honourable per se than long positions (i.e., buy-and-hold positions). Investors are supposed to start out by trying to estimate the value of a company by analysing and assessing its business potential. Such disparity between a company's stock price and its underlying value is the crux of the matter. But the ones who joined the game later on will most likely get a raw deal, because the price they paid far exceeded the company's intrinsic value. Those who were among the first to buy GameStop stock and then offloaded it fast did make a quick buck. In addition, not all the retail investors involved came out ahead. This could entice lead market regulators to take a closer look at current regulations in this domain. As it turns out, the hedge funds involved in the January saga were hugely leveraged, and once the big risk they were taking was spotted, it became their Achilles' heel. Though the stock market saga created as much suspense as even the best of thrillers, it also raised some serious questions about the ambiguous motives people may have for investing in financial markets.įirst, the January clash resulted in part from today's extremely low interest rates, which provide incentives to engage in financial leverage - i.e., to pay for an investment with funds borrowed at an interest rate that is less than the expected gain. ![]() ![]() However noble the cause may be, practices that create a total disconnect between a company’s stock price and its underlying value raise the question of how much small investors can trust the stock market." The crucial issue here is what the primary purpose of investing in the stock market should be. ![]()
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