it is easy to believe an important function of the commodities markets is price discovery, there is a simple relationship between a hard asset and its' price. now with the stock markets, i have troubles believing there is a similar relationship. from reading about how the markets operated 100 years ago, i have concluded investors were primarily interested in dividends. The company's ability to continue to pay, or increase dividends determined the price direction of the shares. value was a relationship between dividend rate, par value, and interest rates. after what we all have seen over the past 10 years, what are the important relationships? value determinants are prone to error, and small changes can significantly impact any "target price" and brokerage recommendations. i have a feeling, if the methods used 2-3 years ago to determine value were used today, many stocks would have negative target prices. is the function of the markets to reward one company over it's peers by assigning a higher value to it's shares, allowing more efficient access to capital markets? if this is the case, why aren't these companies taking advantage of the opportunities? /j.
No so. 72 years ago just before the great depression most stocks had P/E ratios worse than the S&P stocks today. Margin trading and speculation was rampant. Markets inevitably go through periods of excess, and eventually return to the mean. But seeming disconnections can take place that last for many years. Runningbear
the function of the stock markets is to : --accumulate capital for the creation or expansion of businesses. The accumulated capital is usually the excess wages of passive investors ( 401k money, pension plans, etc. ) --to determine the value of businesses ( some believe it does a good job at this, some don't ). --to allow insiders a way to cash out and realize the fruit of their labors. --to provide market participants ( not passive investors ) a way to earn a living
Chasinfla, Excellent and concise explanation. The other reasons given in this thread are somewhat relevant, but mostly hype. The real reason is as you stated, the exchange of private property. I would like to take this time to point out that there has been, quite obviously, a large shift of expectations from what the market was originally intended for and its' current usefulness. Originally, stockholders were owner's of the corporation and as such had a right to the dividends....such is still the case, but is hardly ever practiced... instead they would rather now see their stock price double. Those who still look to such things as PE ratios, dividends, etc. are essentially working out of they old way of thinking, and they don't realize that a stock's price doesn't change just because of fundamentals. I'm not saying either way of looking at the situation is wrong, but people need to figure out which way works, is supported by reality, and stick to it....IMHO (How all of this relates I'm not certain... I guess that I felt a need to rant a little.) Peace
This might simply be a question of semantics, but could you not argue that the REASON FOR the market and the FUNCTION OF are two separate things? For example, the reason for the market might be as Chasinfla said to facilitate efficient exchange of private property. The function of the markets might be something else altogether. For example, the function of the markets is to create volatility because without it the market would implode upon itself. Anyone agree?Disagree?