Term Paper on "Stock Market Experiences"

Term Paper 6 pages (1808 words) Sources: 5 Style: MLA

[EXCERPT] . . . .

Stock Market

History shows that stock markets, per say, have been around for hundreds of years. In fact, one of the first stock market crashes dealt with tulips in Holland. During that era, tulip bulbs escalated in price and at the high point of demand for tulip bulbs, individuals were sometimes trading their entire wealth for a handful of bulbs. Needless to say, when sanity returned to the world, many of these same individuals found themselves totally destitute.

The tulip craze showed a pattern that many stock markets have followed, and the New York Stock Exchange (NYSE) is one of those markets that has allowed investors the opportunity to experience the ups, the downs, and the wild rides available when investing in a volatile market such as one containing stocks and bonds. The NYSE has had its devastating downward swings, including a crash in 1929 that ushered the Depression Era.

"On Oct. 29, the panic that had possessed speculators and individuals was joined at the opening bell by traders for giant institutions. Blue chips like Standard Oil and Westinghouse gapped lower on massive trading volume. On a whim, a messenger bid for 100 shares of White Sewing Machine at $1 -- and in the absence of any other buyers, got it. The stock had been as high as $48 some months earlier." (Kadlec 2003) can hardly imagine the excitement the investor who accomplished that feat felt upon having his trade confirmed and becoming a brand new owner of shares in White Sewing Machine for as little as $100.

I was initially excited and enthusiastic upon learning that I was going to experience the ins and outs of the marketplace in regards to stocks and bonds, although I was not real excited about learning of tulip bulbs, or the White Sewing Machine shares that dropped from $48 each to $1 each in just a few short months. Little did I realize that I was going to acquire an education that would last me my entire life.

Upon being first introduced to the stock market I received an overview that supplied me with background information on the workings of the stock market. This information was enlightening and I studied it in an attempt to be somewhat acclimated to the stock market environment. From this information, I gleaned a number of facts that I had heretofore been ignorant. For instance, I did not know that there was such a wide array of financial investments available to both purchase and sell. Many of these investments sounded as if they had been dreamed up by the same individuals who were instrumental in the 'tulip craze'. Though these investments sounded intriguing and I was eager to get a look at them, I was far more interested in the fundamentals of the market and how those fundamentals could be applied in a fashion that would allow for maximum profit.

In my search for those fundamentals, I discovered some interesting facts about the market. First of all, when an entity purchases stock in a company, it gives that entity certain rights and privileges, as well as certain responsibilities.

The purchase of shares, in essence, means the purchaser is a partial owner of the company. With that ownership comes a responsibility to act as an owner would act. Though these individual stockholders are not actively involved in the day-to-day ownership of the company (that is left to management) many of them do become involved in such events as the annual stockholders meeting.

It is at these meetings that the individual stockholders as well as many of the mighty entities that own shares can discern and influence the direction of the company as well as voice any displeasure or concerns they might have.

Most of the shareholders, however, are not purchasing shares in any particular company due to an interest in having a partial ownership in that company. Most investors seem to be interested in just one thing, and that is; money (or profit). These individuals wish to purchase the shares low and then sell those same shares at a much higher rate.

My experience led me to believe that greed was an overwhelming factor playing a role in the financial investment scene. Whether that greed took on a long-term form, or the form of a short-term option stock bought in the morning and then sold in the afternoon, most investors only wished to know, "how much am I going to make?"

Few, if any, of these individuals wanted to know the fundamentals of the company, and in fact, what I discovered was that most investors could care less about the fundamentals, the desire most of them held in their hearts was the one that allowed them to make as much profit in as short a time as possible.

Many of these individuals assume that they, or their stock market advisor, are able to pick stocks that will ensure their profitability, and in most cases their inheritance(s), even though most will also concede that it is not individual stocks that make them most of their total return. Rather it is the reinvested dividends and interest payments that provide most of the long-term return.

Another of my experiences taught me that there a number of investment advisors in the financial industry who tout their dubious expertise in picking stocks, but according to most experts, most of that expertise is a fallacy.

"By trying to outsmart the other guy it is almost mathematically certain you will under-perform the market over the long-term." (Do the Math) Other advisors tout an asset allocation theory that will allow for the highest possible return at the lowest possible risk. My experience taught me that this method of investing is great for those investment advisors who have little or no experience on their own. Many times the advisors that offer this financial advice are just starting out in the business, or who have been around for a while, but have little or no confidence they can call their own. If they invest in a number of different investments, in a number of different types of investments (short- and long-term bonds, blue chip and growth stocks) chances are that not all of them are going to go up or down at the same time. The total return of this type of investment theory is relatively stable but is not for the true stock market guru.

There is also the investment advisor who offers clients the opportunity to invest in the overseas market(s).

Oftentimes these investors are touting the 'flavor of the month' which has been passed down from on high. It is my experience that there a so many numerous investments to be made in the domestic market, why worry about the intricacies of a foreign market that is not followed as closely or by as many analysts as the domestic market is. Again, the investment advisors that offer this 'opportunity' may have an agenda for investing in those markets that they are not telling the client (such as additional compensation for the amount of dollars invested in those investments).

To watch over those investment advisors that do not take their client's goals and objectives, as well as the client's risk aversion into consideration, an entity was formed shortly after the stock market crash of 1929. That entity was the Securities and Exchange Commission (SEC). The SEC has also been set with the task of ensuring that domestic markets do not offer advantages to those 'insiders' who might look to line their own pockets rather than do what is right for their clients. One worry (in regards to foreign markets) that many experts have been stating lately is that the SEC is forcing U.S. investors to go abroad for many investments that formerly were offered domestically. This strategy could make foreign markets much more attractive and U.S. markets much less competitive than those markets.

A recent report on this very subject stated, "that a large percentage of global securities and derivatives trading activity is moving to foreign countries, with the City of London being the biggest beneficiary." (the SEC's 2007)

It is bad enough that investors have to worry about domestic financial investments, if the SEC is successful in regulating the markets to such an extent that many investors are forced to do business internationally, the U.S. could find itself losing its worldwide financial dominance.

Lastly, what I experienced, was the volatility of the stock market. Many times investments that were up in the morning, were down by the closing bell. I learned that there are a number of ways being used to smooth these volatile hills and volleys, including stops and options. Stops let the investor limit the loss that can be suffered on any particular stock. If a stock is trading at $50 and a stop is entered to sell that stock automatically anytime it falls below a $45 price (for instance) then the investor knows that the most that could be lost would be $5… READ MORE

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