Saturday, May 8, 2010

The vulnerabilities of the stock market

As a casual visitor to the stock market I was appalled at the vulnerabilities of the stock market. Some people think of dealing in stocks as gambling but there is a big difference. Stocks can be manipulated big time and by very few people. For example you just need to sell a couple of stocks at about 20 % less than the current value and see the stock dip in one day. A big company is usually watched by shorts (we can call them as stock vultures waiting to devour the carcass) and there is no escape usually. Yes there is competition out there and quite smart ones too and a company is naive to think no one is out to get them especially if they are quite successful. The workaround may be is to limit the quantity of stocks that go outside the company and also may be deny sales at price way below a reasonable percentage. Seriously, alarm bells should ring if the current value of a stock is 20 and 50 people bough it at that price and suddenly 10 people decide to sell it at 18. These dips have to be steep to make a difference else the authentic sales can smooth out these ripples. Ironically, you may make more money shorting a stock than holding on to it once you are certain a company is doing well.

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