Beat liquidity market stock theory using
Today, the word capital is used to describe what once was called stock. Certificates of partial ownership in the joint stock company attested to an ownership share and could be bought and sold. The first company that raised money through a public share offering where the shares later traded actively was the the Dutch East Indian Company, known by its Dutch initials as the VOC. The VOC raised money in While it was always possible to sell share most were initially kept as long term investments.
An increasingly vigorous trading market for these VOC shares arose over the decades mostly in Amsterdam. The Primary Market, which could more descriptively be called the Money Raising Market, where companies sell shares to investors and receive money also referred to as capital which they typically invest in assets necessary to carry out their business.
Also in this market successful companies eventually issue dividends to the share owners. Transactions that occur in beat liquidity market stock theory using Primary Money Raising Market include the following:. This Primary Money Raising Market does not include trading shares with other investors. An investor in the Primary Market should expect to beat liquidity market stock theory using a reasonable return on investment by collecting dividends over the indefinite future.
An additional possibility is that the company itself might offer to repurchase its own shares. Thus an investor can earn a good return without ever trading shares with other investors. History proves that investors in aggregate and on average have received reasonable returns in the Primary Money Raising Market — that is by investing their money in corporations and collecting their future pro-rata share of dividends with no stock trading.
Such investors have historically received sufficient returns via dividends to entice them to forego the immediate and alternative uses of their capital in return for uncertain future dividends. This supports the buy and hold approach to the market — on average it generates reliable long-term returns.
When we say that companies raise money in the stock market, it is in this Primary Money Raising Market that they do so. The development of the Primary Money Raising Market played a large role in creating the early trading and manufacturing companies in Europe and in financing the industrial revolution and subsequent technological achievements. All hail the Primary Market!
The existence of the Primary Market also led directly and immediately to the development of a Trading Market. The Secondary Market or Trading Market is where investors trade their share certificates with each other. This Secondary Trading Market is the one that garners almost all of the media attention.
When a company sells a share certificate in the Primary Money Raising Market, that share might later trade hands many many times in the Secondary Trading Market. In reality the Secondary Market supports and enhances the Primary Market in a number of important ways:. Companies are indirectly affected by the value at which their shares trade in the Secondary Trading Market.
If their shares trade higher then they can more easily beat liquidity market stock theory using additional funds in the Primary Money Raising Market, if they choose to do so. Conversely, if their shares trade lower then they will have a more difficult if not impossible time raising additional funds in the Primary Market.
Beat liquidity market stock theory using can therefore use the Secondary Trading Market for at least four purposes:. Investors in aggregate always lose money in the Secondary Trading Market. Dividends are paid in the Primary Money Raising Market and trading shares does not directly change the amount of dividends that a firm will ultimately pay.
An argument can be made that that the Secondary Market does indirectly affect the Primary Market by identifying which companies will be able to raise additional funds in the Primary Market. But in general the fact that a share trades hands has no impact on the dividends that it pays. For every trade that is profitable beat liquidity market stock theory using one investor by buying a share at what turns out to be a bargain price, an equal and opposite loss is suffered by the investor s on the other side of the trade.
This is in sharp contrast to the Primary Money Raising Market where if the fortunes of a company improve, all investors make more money and no investor loses money as a result of a company becoming more profitable.
Also, for every share that is traded, a beat liquidity market stock theory using party makes a commission. Thus trading shares is ultimately a negative sum game. Investors in the aggregate must always lose money on the trading aspect of investing. Still, this trading is beat liquidity market stock theory using and supports the Primary Money Raising Market.
And, more astute or luckier traders will make money at the expense of less astute or unlucky traders. But all traders should be aware that they are ultimately engaged in a game that is clearly stacked against most of them. The brokers are always taking a commission and traders in the aggregate must always lose.
Trading is ultimately an exercise in trying to outsmart other investors. In contrast, investing in the Primary Money Raising Market is ultimately an exercise in making money from the customers of business enterprises.
Even though trading is in aggregate a losing exercise, almost all investors do and should engage in some trading. The stock market often offers some shares at what appear to be irrationally expensive prices and other shares at what seems to be irrationally low prices.
Investors trade to take advantage of this. A trading investor does not have to outsmart all other investors. A certain level of trading activity is absolutely essential to the proper functioning of investing. Beat liquidity market stock theory using, it is not necessary for any individual investor to engage in more than a very minimal level of trading. It provides an average return at minimal commission or investment management costs. An index strategy does not rely on outsmarting other investors and in the long run derives its returns from the dividends and profit potential of companies and not from other investors.
Any and all strategies that aim to provide better than average returns must by definition rely on outsmarting other investors to garner the above average return.
Clearly only a minority of investors can ever achieve above average returns. All strategies except buying and holding randomly selected portfolios and index investing attempt to outsmart other investors.
As beat liquidity market stock theory using above, this is always a losing game for investors in aggregate, after trading costs are considered. Technical trading and timing the entire market or individual stocks are beat liquidity market stock theory using designed to outsmart other investors.
In order for some investors to beat the market, it is clear that others have to under-perform the market. The good news on this front is that it seems clear that most investors have little or no expertise in investing and often seek their advice from non-partial sources such as brokers. It does seem logical that more educated investors that apply knowledge, diligence or inside information should in fact be able to outsmart the crowd. Viewed in this light it should be possible for the most gifted and hardest working investors to handily beat the average performance.
Still, analysis has shown, that after trading commissions, it is very difficult to consistently beat the market average. I believe that beating the average requires consistent and diligent application of an intelligent methodology. Investing in businesses is profitable, on average, in the long run. A diversified portfolio of investments in businesses will tend to earn a good return in the long run.
Investing only directly in the Primary Money Raising Markets is usually not feasible since it is difficult to gain access to a diversified range of private placements and Initial Public Offers. In addition such a strategy would initially result in all of the money being placed in newer less mature companies. The best way to simulate an average investment in the Primary Market is probably to invest in equity index funds. Trading and all stock selection methods including conservative value based strategies are exercises in trying to outsmart other investors and after commissions are by definition a giant losing game for investors in aggregate.
Beating the crowd will require an investor to follow a somewhat unpopular strategy and will require diligent analysis or inside information or access to such. The strategy must be at least somewhat unpopular since you clearly cannot beat the crowd — by following the crowd. By investing in index funds, investors can make an average return, which because of low trading costs will turn out to be well above average after commissions are considered.
The inescapable conclusion is that most long term stock investors should invest strictly in index funds unless they have strong reasons to believe that they can consistently outsmart other investors. Not coincidently, portfolio theory arrives at the same conclusion, on a risk adjusted basis the market index is where investors should place their equity investments. Even if an investor has a strong aversion to the volatility of the index and has other goals such as stability of returns, financial theory is clear that this is best accomplished through adjusting the proportion of investments beat liquidity market stock theory using the index fund and the proportion in risk free investments.
Those investors who truly can consistently beat the market and they are probably few in number should certainly attempt to do so since they can potentially earn much higher than average returns. But these strategies cannot by definition beat the market if they have become too popular. Since mutual funds are very popular, there is no possibility that, after expenses, the average mutual fund will beat the index.
It is remarkable that almost the entire financial community consisting of hordes of advisors and brokers of of all kinds exist to perpetuate and profit from the notion that most investors can and should attempt to beat the market. The reality is that the great majority of investors have no good reason to think that they can consistently beat the market and should stick to beat liquidity market stock theory using funds to improve their results and beat liquidity market stock theory using them up to average, after commissions.
All hail index funds! All attempts to beat the average will, by definition, result in on average under-performing the average after trading costs are considered. However, some smart investors will indeed consistently beat the average. But it requires skill and a diligent application of an intelligent methodology.
Unskilled investors including those using mutual funds and most advisors betting that they can beat the market should be aware that the math is stacked against them. Transactions that occur in this Primary Money Raising Market include the following: A company typically sells shares to a small number of investors when it is initially formed and then may or may not issue shares again at later dates.
Many publicly traded companies also issue stock options and when these are exercised the result is that the company issues additional shares in exchange for the face beat liquidity market stock theory using of the option. Some companies also occasionally offer to repurchase shares from their investors.
Successful companies ultimately issue dividends to investors. In reality the Secondary Market supports and enhances the Primary Market in a number of important beat liquidity market stock theory using The Secondary Trading Market provides liquidity so that an investor in the Primary Money Raising Market can cash out the investment without having to wait and collect dividends over the indefinite future.
Without this liquidity investors would be much more reluctant to invest in the Primary Market and if they did they would want a bigger expected return. The cost of raising money would be much greater. Many companies would never have been able to raise money. In short the technologically advanced world that we live in would have been delayed, perhaps for centuries, if there were no Secondary Market. All hail the Secondary Market! The Secondary Market allows investors to vote or bet as to that expected value.
Investors can therefore use the Secondary Trading Market for at least four purposes: To enter the market by buying out existing investors rather than waiting until companies wish to raise money in the Primary Money Raising Market.
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