After reading this article you will learn about stock exchange and speculation.
Stock exchange is a place where dealings in stocks and shares take place, a market where those desiring to buy stocks and shares are brought into contact with those who want to sell. It is, therefore, primarily, mainly a market for existing securities. In simple words, the stock exchange is the market where securities, stocks, shares, debentures and bonds etc., are bought and sold freely.
It is through the agency of stock exchange that people invest their money into joint stock companies. This money cannot be withdrawn from the company directly, but may be obtained back through its transfer. Shares, debentures etc., are transferable from one holder to another at rates existing in the market.
If there were no stock exchanges, one could not have been able to dispose of his shares at the time of need, and thus very few people would have dared to invest their capital into loans floated by either the Government, or other bodies.
The price at which a security can be bought or sold on the stock exchange will depend, as in other markets, on the relative strength of the demand for and the supply of that particular security at a particular time.
If business prospects are good, the prices of shares will generally be high; if prospects are poor, prices will be low. The publication of a company’s balance sheet will affect the price of its shares favorably or adversely, as the case might be. The members of the Stock Exchanges are Jobbers, who deal on their own account, and brokers, who act as agents on commission between the public and jobbers.
A broker wishing to obtain stock or shares for a client will approach a jobber who deals in the required security and ask him to state a price, but without informing him whether he wishes to buy or sell. The jobber will quote two prices, the higher bring that at which he is prepared to sell, and the lower that at which he is prepared to buy. Thus, through the brokers and the jobbers buyers and sellers are brought into contact with one another.
Since the exchange is a perfect market and since its deals are mainly for the settlement at the end or the fortnightly Accounts, its chief activity is speculation.
Speculation-Bull and Bear:
Speculation may be defined as buying what you do not want, from someone who has not got it.
There are two reasons why people buy stock exchange securities:
(i) Some people buy for the sake of investment, that is, with the intention of holding the securities in order to secure a regular income from their capital.
(ii) Other people pay little attention to the income to be obtained from securities, but are keenly interested to sell the securities when they believe prices are near the peak. These people are speculators and their aim is to take advantage of fluctuations in the prices of stocks and shares in order to make a profit for themselves. Such profits are known as capital gains.
A speculator is neither a manufacturer nor a holder of goods. In fact, he deals in risks and not in goods. A speculator foresees a rise in prices in the future, he buys with the intention of selling afterwards at a profit and when he anticipates a fall in prices, he sells with a view to buy in future at lower prices.
Those persons who buy securities hoping that their price will rise are known as Bulls and those who sell expecting prices to fall are known as Bears. If the market is keen to buy it is said to be bullish and if it is keen to sell, it is bearish. The existence of speculators in the market means that at all times it is possible to buy and sell.
Speculation, therefore, helps to make securities more liquid. The activities of some speculators tend to steady prices, for they enter the market as buyers when most of the people desire to sell and so they prevent prices falling as much as they otherwise might; when others are wanting to buy they enter the market as sellers, and so prevent an undue rise in prices.
Advantages of Speculation:
(i) As explained above, speculation lessens price fluctuations.
(ii) Speculation guides the investment of capital in securities.
(iii) Speculation promotes the establishment of equilibrium between supply and demand and hence consumption becomes more steady.
Disadvantages of Speculation:
(i) Those indulging in speculation may attempt to influence prices by their own activities, trying to push prices down just before they buy or to raise prices before they sell.
(ii) Speculation of an undesirable kind may therefore result in capital not being employed to the best advantage, and so lead to the misuse of real resources.
(iii) Excessive speculation may lead to trade depressions.
Control of Speculation:
The difficulty in controlling undesirable speculation is of distinguishing between speculative dealings and genuine investment.
The following suggestions may be put forward for restricting the activities of speculators on the securities market:
(i) Once securities are transferred to a new owner, he should not be permitted to dispose of them until a certain minimum period has elapsed.
(ii) Bank lending for speculative purposes might be restricted.
(iii) A capital-gains tax can be made to fall more heavily on short term capital gains.