The FINANCIAL — Firstly, some thoughts on stock markets, their structure, their behaviour and the much talked about stock market volatility.
Stocks are shares held by individuals and institutions, both private corporations and sovereign funds, in companies which are listed on stock exchanges around the world. Shares represent the ownership an individual or institution will hold in a listed corporation. The value of the shares in the market, on a given day, is deemed to represent the net tangible asset (NTA) value of the company divided by the number of issued shares. However, no corporation either understands or can tell you what the net tangible asset is on a given day.
In addition, there is the formula of what is called the price: earning multiple. Typically, if a company posts a profit of one million dollars during one quarter of the year, stocks are often valued at a P:E multiple of 10 or more as standard practice. However this valuation multiple can be lower or higher depending on the dynamics of a corporation’s growth strategy and prospects for growth, its embedded core competencies in human capital, in research and innovation, its expanding or contracting market share and it prospects of larger or smaller projected profits.
There is a fundamental economic dictum that all share markets operate on the basis of an Efficient Market Hypotheses, which simply means that all information, financial and non-financial are available to investors pertaining to a specific company and its shares. The fact is that it is near impossible for anyone to completely understand and digest all the information, if it is all readily available, on the real value of a share. Who can predict what the price of oil will be this time next year as oil flow and prices are not necessarily determined by technology and the availability of oil resources. There is immense politics and power-play, changing political landscapes in oil producing and consuming countries, wars, rebellions and a myriad of other known and unpredictable events which can influence the price of oil.
There is no way on earth that one can predict the share prices of leading banks this time next year. Bank shares are underpinned by a heap of variables: national and global economic growth, mounting unrecoverable or bad debts to individuals, corporations and governments, employment rates and the state of the economy, consumer sentiments which make people spend or save and the more macroeconomic drivers of production, spending and savings which shape the world’s development trajectory.
Thus, the ownership of a share of the wealth or the loss of a company, in terms of individual and institutional shareholding, has very little basis on the real wealth or loss of a corporation, but allows the shareholder to speculate daily on the profits that could be made by selling, holding or buying some shares. Currently, there are more mourner shareholders who grieve over the massive loss of wealth on shareholdings. Fortunes have been made and lost on buying and selling shares in the global stock market casinos and the fact remains that the massive wealth amassed by successful trades or the massive losses incurred in unsuccessful trades need not reflect the reality of a corporation’s growth or failure. In financial lingo, shares are driven not merely by fundamentals but by market sentiments which are shaped by fear, by greed, by misinformation and the nature of global political equilibrium and growth.
It is even more complex when you begin to realize that all the numbers you read and hear may just be false. Enron, one of the world’s largest oil companies, cooked its books to show profits and drive share value up and then ended bankrupt with most of its senior executives being sent to jail. Projections from financial and economic pundits, the voluminous research and opinion on whether and when an economy will dip into recession or begin to post growth, whether and when a major corporation will eclipse or shine are all mostly conjectures, supported by some and derided by others.
In the sublime thoughts of most pedantic economists, shares and share markets were the greatest re-distributors of corporate wealth among millions of people. These economists, through an invented Efficient Market Hypotheses paradigm, made us all believe that crooks, criminals and manipulators will not be able to affect the real values of shares and the wealth of millions. The totality of “insider trading” laws which prohibit sensitive information related to the value of shares are difficult to police and it is entirely feasible for such information to be transmitted in more subtle and concealed ways.
When stock markets are down, and the market capitalisation of a corporation is down, its inability to borrow money at better terms are either restricted or denied, there is always the panic and uncertainties which envelop corporate strategies. In some cases, some corporations have resorted to keeping the market sentiments and the share prices up though complex price fixing mechanisms.
It may be that shares , shares ownership, share trading in the market place is perhaps the best available alternative of allowing individuals and corporations to enter the global scene in wealth creation. It is also somewhat certain now that the billions of shares traded daily on major stock exchanges and their volatility are not linked to a corporate bottom line of profits or losses. It is becoming very much clearer now that stock market behaviour is determined more by the volatility of financial and non-financial events and that they are somewhat de-linked from the real world of productivity and profits.
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