Introduction
Growing under the shadow of the worldwide havoc brought by the depression of the thirties the stock market crash of 1987 emerged as a big blow to the economic as well as social and political lives of people. As the vivid decline strike the news, there was some anxiety in the public that this was a symbol that economic depression would before long hit the world financial system as it did with the stock market crash in 1929.
Consequently, there were rigorous media efforts to bring up to date the public even though alleviating their doubts concerning an economic catastrophe. The latest was seen in 2008 and people are still finding it difficult to get out of damage incurred by this economic disaster. Thus, the market crash of 2008 has left a perpetual blotch of prevailing economic uncertainty. So, it should be asked whether if there is any need for the stock market at all or not?
Stock market mechanism
In this present world of prevailing dynamism monitory power operate as the supreme authority. It forms the lone means of fulfilling fundamental human requirements as well as aspirations. Thus, economic instabilities like stock market crashes, fiscal depressions etc cast devastating effects on human life. A stock market crash is an unexpected spectacular turn down of stock prices transversely a noteworthy cross-section of a stock market. Crashes are driven by fear as much as by fundamental financial issues. They repeatedly pursue tentative stock market bubbles. Stock market crashes are commonly observable facts where peripheral fiscal proceedings coalesce with public activities and psychology in an optimistic feedback loop that motivates investors to put on the market. (Fung 2008)
The menace of a market crash
By and large, crashes more often than not take place under the following circumstances, such as a long drawn out period of increasing stock prices and financial optimism, a market where price-to-earnings ratios go beyond long-term averages and widespread utilization of margin debt and influence by market contributors. There is no numerically precise explanation of a crash, but the expression normally is relevant to sheer double-digit percentage losses in a stock market directory for more than a few days.
Crashes are frequently differentiated from bear markets by panic selling and sudden, spectacular price declines. Bear markets are phases of moribund stock market prices that are calculated in months or years. While crashes are over and over again related to bear markets, they do not essentially go hand in hand. (Shastri 2008)
On the other hand, the mid-1980s were an era of strong fiscal buoyancy. From August 1982 to August 1987 when it reached its peak, the Dow Jones Industrial Average (DJIA) increased from 776 to 2722. The growth in market indices for the 19 biggest markets in the globe averaged 296 per cent all through this period. The total amount of shares dealt on the NYSE had increased from sixty-five million shares to hundred eighty-one million shares. The famous crash on October 19, 1987, a date that is also recognized as Black Monday, was the pinnacle finale of a market decline that had set in motion five days before the incident on October 14th.
The DJIA declined 3.81 per cent on October 14, followed by an additional 4.60 per cent drop on Friday, October 15th. But this was zilch compared to what lay to the fore when markets opened on the following Monday. (Chuliá 2009) On Black Monday, the Dow Jones Industrials Average plunged 508 points, losing 22.6% of its worth in one day. The S&P 500 declined 20.4%, diminishing from 282.7 to 225.06. The NASDAQ Composite lost only 11.3% not for the reason of self-control on the part of sellers but as the NASDAQ market system botched. Inundated with sell orders, countless stocks on the NYSE had to face trading stoppages and hindrances.
Of the 2,257 NYSE-listed stocks, there were 195 trading hold-ups and halts throughout the day. The NASDAQ market charged much worse. Because of its dependence on a market-making system that permitted market makers to back out from trading, liquidity in NASDAQ stocks dried up. Trading in several stocks came across a pathological situation where the bid price for a stock went above the asking price. These locked situations harshly abridged trading. (Bae 2009)
Remedies
Efficient Market Hypothesis (EMH) is a situation in financial markets when the given prices of stocks represent all possible market information in reaching a particular level. Therefore, there is no requirement for stocks analysis as investors can get all possible information about a share through its current price. The current price reflects updated information. In theory, information quickly gets absorbed in all share prices in competitive market conditions. Stocks are like ‘units’ of information that get sold. The current price in markets all over the world reflects the best possible estimate of the situation.
There are three variations of EMH which can form around financial markets: the strong form EMH, the semi-strong and the weak forms. The current price in markets all over the world reflects the best possible estimate of the situation. The weak form of EMH states that all past information has been assimilated into the current prices of stocks. (Fung 2008)
The ‘weak’ label is given because share prices are available to everyone and not a privileged few. So, investors need not try to dig up past information which will help them in deciding because in a sense all past trends have been considered. In this school of opinion, insiders in a company are not able to take advantage of inside information which they might hold. The stock prices of organizations have already anticipated future trends such as take-over and are the best ‘tips’. Semi strong form – In a similar vein, all information contained in company brochures, media reports is faithfully reflected in prices no adjustments are required to accommodate this information. (Bae 2009)
The whole point of the hypothesis is that no one can reap any benefit from the information that is available to all. Nonetheless, there is an opinion which states that financial models applied through EMH fail to explain operations in the real world. Price movements and market mechanisms are a constant preoccupation of financial experts. The relevance of market theories holds good only till the next set is proposed. There have been attempts to challenge EMH concepts and to bring new models to bear. Through the past few decades or so, EMH has been seen to complement the situation in stock markets. (Fung 2008)
Theorists have tried to readjust price models around EMH or tried to predict prices based on the past and have seen that there is no significant effect. Evidence does seem to point to the fact that prices can be anticipated with some degree of predictability. The opinion against EMH says that price predictions are largely tuned to irrational investor behaviour, popular trends, or rumours. Meanwhile, there have been investors like Warren Buffet who have made huge fortunes by beating the market constantly. So, there are both advantages and disadvantages of the stock market. (Shastri 2008)
Stock Market’s Disadvantages
There is a general tendency of the mass to underestimate the market and consider it as a source of making fast money without any problem. But this is a terrible misconception. Like any other business, stock market trading requires a thorough understanding and knowledge of the trade. There is no easy money on offer and the general idea of the stock market tempts people to underestimate its risks.
The expectation from the stock market trading return is highly inflated. This makes loss very demoralizing. It has been found that the majority of the people quit before the first year of stock market trading.
As the aspects and variables of stock market trading require a well all-round knowledge of the market and the assumed forthcoming situation, there is always a chance that people would suffer heavily on financial grounds.
Stock Market’s Advantages
However, if the market is analyzed properly, there is a fair chance that the yield would be positive. It can be well stated that the potential of the business of stock market trading is extremely high and it is possible to make a huge fortune out of the stock market trading if applied properly and with wisdom.
Another advantage of the market is that its rewards are not firmly dependent on any specific timeframe. This potentially makes the reward to be high and frequent. The lack of time bound payment also makes it possible for the efficient trader to wait for a long time in case the market promises a high return in the longer term.
Stock market trading requires an overall study of the market and mass psychology. A successful stock market trading professional thus gains great experiences that are practical and applicable to actual life. (Fung 2008)
Need of stock market trading
So, is the stock market a need for society? Do we need the stock market? It can be stated that the Stock market poses that all investors look at all information in the same manner without variation. If one investor is scouting for undervalued stocks while another search for picks reflecting growth, then theoretically they will have formed an assessment of particular stocks at fair market value. So, the opponents state, when investor’s view stocks differently, there is little likelihood of determining fair prices. Thus, speculation is aggravated, and it is equivalent to gambling. However, in fair market competition, the value of the stock market is undeniable.
True, that the recent crashes caused damage but that should not stop the market from trading as these parts are just portions of good and bad days at the office. The emerging business trends are likely to be increasingly imperfect as no known model is likely to have a definitive impact on behavioural finance. It is safe to be assumed that investors can only mature over time and choose to continue investing based on fundamentally well-informed principles. So, we do need stock markets in the long term.
Bibliography
Bae, S. (2009) Derivatives trading, volatility spillover, and regulation: Evidence from the Korean securities markets’, Journal of Futures Markets, vol. 29, no. 6, pp. 563-597.
Chuliá, H. (2009) ‘The economic value of volatility transmission between the stock and bond markets’, Journal of Futures Markets, vol. 28, no. 11, pp. 1066-1094.
Fung, J. (2008) Efficiency of single-stock futures: An intraday analysis’, Journal of Futures Markets, vol. 28, no. 6, pp. 518-536.
Shastri, K. (2008) ‘Information revelation in the futures market: Evidence from single stock futures’, Journal of Futures Markets, vol. 28, no. 4, pp. 335-353.