The Stock Market as a Voting Machine and Weighing Machine

Introduction:

The stock market is a market where stocks of various listed companies are bought and sold. The stock market basically provides one with an opportunity to own one of the companies of choice by purchasing their shares in the stock exchange market. Different people invest in stocks or shares for different reasons, there are those who invest to gain in the short run (speculators) and avid investors who invest to gain in the long run, through increases in the share value and price as well as dividends that the company may pay after posting a good profit and loss account (P&L).Its against this background that this paper seeks to discuss the stock market as a voting machine in the short run and weighing machine in the long run.

According to (Graham,2007)As a voting machine the operations of the stock market basically hinges on behavioral financial trends, money flows within the economy, demographic trends and factors and statistical arbitrage, which involve trading on the news and not fundamentals of the stocks and the market. On the other hand the stock market is a weighing machine in the long run in that in the long run investors basically invest to accurately assay the worth and price of the financial securities, this has been said to be the basic reason to the existence of financial markets and not speculative gains in the short run as in the former-stock market as a voting machine.

 Grisanti, et.al, (n. d)further build on Grahams sentiments that the short term investment is rather more risky due to the fact that its normally characterized by emotional trading/ investment(the voting machine)as people may decide to sell of their share in a blue chip company due to a mere insignificant  drop on the share price or a scare in the market not keeping heed of the fact that the company shares would most likely be headed for a major rise in the near future i.e. 5years time due to the companies due to the companies broad markets, availability of liquid stocks and diversification in other industries and sectors to minimize losses.

The stock market as the weighing machine stresses on the long term value creation for the investor on the shares purchased. (Grisanti, et.al, n. d)   This is said to be the best mode of investment in the stock market since the chances of one loosing on the shares bought are minimal especially if one bought shares of a company that is effectively ran and holding the shares till their value goes up. This may not happen in the short run since the market is always composed of both investors who base their investment on fundamentals and speculators who are always panic driven thus destabilizing the share prices in the short run before the shares can prove their ultimate value in the long run that may be higher than the price that they were bought.

A case in point are the shares of the Cisco company in the united states which in 1999 its shares rose and were selling way past 100 times the shares earnings so those who had invested in the company earlier and did not hurriedly sell off their shares gained. (Grisanti, et.al, n. d)

Conclusion:

            In a summery whether to invest in the short run (the voting machine)that less predictable or in the long run(weighing machine) is basically ones choice and depend on the stocks in question and the investment motive, but the underlying fact is that to be on the safer side, investors that put in much money on the stock market should not only expect good returns in the long run but also diversify their investment portfolios.

References:

Graham,B.(2007)The stock market machines.[Retrieved from]

http://www.castrader.com/2007/03the_stock_market.html

Grisanti, et.al. (n. d) The intelligent investor. [Retrieved from]

http://www.gbpfunds.com/letters/pdfs/3q07.pdf