The Stock Market

I believe our stock market(s) is in desperate need of regulation to return it to what I believe it was originally intended to be which was a central marketplace individuals or institutions could go to purchase ownership shares in companies they believed would grow and prosper and thereby increase the value of their ownership and thus their personal wealth. The concept obviously involved a certain amount of risk and, to that degree, was, and still is, a gamble, but that simple concept has been allowed to expand to the point where the stock market is not much better, in many respects, than a gambling casino in Las Vegas.

There are four particular practices/things that need to be eliminated from the stock market. First, are derivatives. They are nebulous "things" related to financial instruments, but not really financial instruments themselves that are difficult for anyone to define but are the very things the Special Products Division of AIG got involved in that ruined our financial system. Investopedia.com defines a derivative as "A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros." This kind of activity is too complicated and too risky to be allowed to continue in our stock market. Betting on when the weather or the Consumer Price Index will change is something that should be done in Las Vegas.

Second, are hedge funds. We don't need hedge funds. The very name sounds like something sneaky and hedge funds, for some reason, probably because they are only available to the very wealthy, are allowed to be much more aggressive (careless) than regular mutual funds. InvestorWords.com defines a hedge fund as "A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%)." Some hedge funds were actually doing nothing more than betting on the collapse of markets or institutions. How is negative investing helpful to America's businesses and our economy? Hedge funds have to go.

Third, is the practice of selling short. Wikipedia define short selling or "shorting" as "the practice of selling a financial instrument that the seller does not own at the time of the sale. Short selling is done with the intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument." On a very large scale, this is what many hedge funds were doing. I think, very simply, that this practice is ridiculous and has not place in our stock market.

Finally, there is the practice of buying on margin. Wikipedia defines Margin buying as "buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one's own cash used." I don't believe we need to allow this practice to continue in the stock market. If you want to borrow, go to a bank. Stock brokers should not be allowed to loan money to anyone, particularly to gamble with. This practice should be disallowed entirely.

In conclusion, I believe the stock market needs to go back to basics. It should exist only as a vehicle to help American businesses and their investors grow and prosper. It should not be a casino for the very wealthy or institutional investors to gamble away the county's and our company's future. The four practices/instruments I have mentioned above should simply be declared illegal and the stock market should return to a vehicle to help our economy flourish and prosper.