Market Failure and Opportunity, Assessment Example

Abstract

It is true that the stock market has great potentials for daring and shrewd investors to create wealth and do it quickly. Many people have actually succeeded in amassing extreme amounts of wealth from the stock trading floor. Nonetheless, a close inspection reveals that this potential has been monopolized by a marginal cross section of the society. Only a few stock investors ever make great profits from stock trading because in the nature of the game, wealth, access and distribution of the opportunities in the industry are a reclusive benevolence of the wealthy (Schwager116-153). In the paraphrased words of Warren Buffet, the stock market might seen equal and greatly liberated from undue market practices from the outside, but it is while on the floor that one finds the truth. The stock market is today biased towards market failure traits that favor an elite few with the supply of investment opportunities.

Thesis Statement

Modern stock markets portends great avenues for almost every willing investor to exploit in wealth creation but the common practice in stock trading raises all these avenues to echelons beyond the reach of the ordinary masses and awards them undeservedly, to elite, influential and wealthy sections of the populace.

Introduction

Most literature on stock market trading has a funny way of boasting and or praising its efficiency in an ostentatious way. To an outsider, the market seems so organized and structured that making profits seems to be totally out of your control. To newbie investors, the stock market seems like the only place where investment success accrues from luck and unpredictable turn of events. However, the most shrewd stock market dealers know how inefficient the market can be in equalizing the margins of risk and opportunity.

To the few insiders who know how to choose and play their cards well, the stock market represents a rich minefield of opportunities, opportunities that can be ferret for and handpicked based on conscious personal determination of what the future events will turn out to be. To these select few, the ability to make a killing is all in their ability, control and expertise. They are able to easily select profitable engagements that translate to millions of US dollars by the day.  Warren Buffett is a perfect illustration of this club of elite stock market investors. The only existing difference between the Warren buffets and the losers who quit the stock market trade within days of their investment is in identifying opportunities and capitalizing on them to make a profit (Schwager116-153).

This does not however mean that the stock market is perfect in its outlay and in the opportunities it hands over all the players on its realm. Rather, the situation is to the contrary. We have so many instances of market failure and market failure causes that are juxtaposed in the few existing risks of the market. Sometimes, these opportunities are handed down to individuals in a rather unequal, unfair and unmerited fashion. Sometimes, the success or failure of the investments committed to the market is not solely determined by shrewd skill and ability since something that is totally unrelated to the market (political changes for instance) can as well grant success to any deal or ruin it on the banishment of a market failure.

For the purposes of this paper, the term market failure will be given the attributed reference of economic situations in any given market where the amount of product the customers need or require is not equitably supplied. Many scholars have called market failure the disequilibrium of supply and demand, where supply fails the demand curve in availing equal opportunities and access to the supply levels. This means that a market failure has a great potential of ruining an economy.

The failure can compound a multitude of negative effects on an economy to a point where there is an optimal resource allocation chaos ensues. The poor distribution of resources usually unfairly affects the availability and access becomes unequally distributed. The social costs of engaging in the process of producing good and or service and even the opportunity to do so is unequally distributed. What this plays out to in the final analysis is a wasteful exploitation of available resources and then an unequal society since some individual has an unfair advantage to available resource usage.

It is upon that understanding of potential market failure that we now evaluate the opportunities and limits depicted by the stock market today. The paper attempts to argue that the stock market is abundant of opportunities, opportunities that can be exploited by almost everybody within a particular market segment. The problem however is the market failure characteristics that are featured in contemporary stock markets, within the US for instance and globally. These limiting features make the distribution of opportunities in the stock trading unequal. The opportunities are unfairly placed within the reach of only a minute segment of the general populace.

This means that the ability to make a profit in the stock markets, you need much more than the knowledge of how to do it. You need to be strategically placed and disposed to exploit the available opportunities. This is not just a claim that is labeled in a generalist attitude on stock trading. Rather, let’s follow through the argument presented by eth paper and see how that claim represents the factual situation.

The Significance of Poverty and Inequality in the Stock Market

There might not be a racial produce, class segregation and such discriminatory requirements imposed on stock market players. It is easy to say that anybody who wishes can participate in stock trading without being unfairly delimited (Schwager. 116-153). That is what the policies dictate and practices usually denote the same equity across the board. From the outlook, from the books and from a legal standpoint, the stock market opens the doors to any players with an interest.

But that equality lasts up until you reach the trading floor. In 1998, the United Nations Development Program accurately reported that the 225 richest people in the world had a combined wealth that exceeded US $1 trillion. Now, that represents more than the combined annual income 2.5 billion people in the world today. That is not all. The UNDP report pointed out that the aggregate wealth of the 3 richest guys in America exceeded the combined GDP (not annual revenue) of 48 developing countries. Without the need to elaborate further, the implication is clear here. Such three individuals cannot, can never have equal opportunities with the average Americans on the stock market floor.

Let us take the US scenario for instance. The American economy has generally been very prosperous from 1960’s through the 1990’s. Yet the wealth creation opportunities were mostly at the disposal of a few Marxian ‘means owners’. The workers driving the manufacturing industries remained at a stagnated point. The US federal government slowly edged from the traditional tax policies that had previously sought to favor poor fellas, the low-income families for instance, at the unfair expense of most wealth controllers.

The new tax policies were accompanied by reduced spending on domestic social programs initially intended to aid the disadvantaged populations. The result was that wealthier families gained an exclusive access and opportunities to earn from a booming stock market. Majority of Americans could never rise up to exploit the opportunities availed by stock trading.

Look at it this way. While not saying who should and who shouldn’t trade in stock markets, stock releasing entities such as companies usually state the minimum number of stocks a buyer must reach at the minimal most purchase order. Now, that minimal level, demands the amount of capital that only a minute fraction of Americans can afford, given that most are in the stagnant wages bracket. Is that discrimination? Is that an unfair distribution of opportunities and or products/services to the population? Is that not limiting the access to opportunities supply to the market demand? Is that then not market failure as defined in the above section?

The UNDP report also reported that wealth projections in 1997 strongly suggested that a whopping 86% of all stock market gains in the years stretching from 1989 to 1997 had exclusively gone to the top most 10% households. The next 42% went to wealthy, of so called most well-to-do families that represents only 1% of the population. Meaning that the stock market was segregating against the supply of opportunities based on the income brackets one was constrained. That is market failure illustrated to perfection.

Poverty plays a great role in creating market failure instances in the stock market. In the actual settings, the stock market is not an equal opportunity field for al willing participants. It sometimes grants some people great avenues of multiplying their wealth undeservedly while limiting the access of the same opportunities to those who would do with them towards attaining economic liberation. Participation in the stock market may seem broad from the outset, and is sometimes very broad, but is it also remarkably shallow to a selective population of those who require access.

The next important point to note in this line of the argument, how poverty plays out as a central determiner of stock market fortunes, is that it has so many players and yet very few of these players ever make a fortune. Out of every 100 stock investors, only 3 ever access the magical fortunes that the market is reputed for. Today, more American adults possess or own some stocks and or stock mutual funds, than in any other time in history. Recent research report on Financial Times indicated that 71% of American households have ownership over some shares.  The problem though is that almost all these families only hold less than US $2,000, especially mutual funds and 401(k) plans.

Look at it this way. If your stock capital is US $1000 and the sale advantage is 50 cents or less, like it most always is, what would be your gain? That dismal amount does not even count as profit given the amount of research and time commitment you have to factor into the deal. Add some agent’s fee on top of that and you see why the stock market does not create millionaires overnight. Now try to imagine that the investment capital was US $ 400 Million. Then you know why we have so few Warren Buffets around (Schwager 116-153).

Even if you adjust figures for inflation, you will find that the average net worth of middle class American households is below 10% what it was in 1989 even when the families have stocks to their names. That is a decline of over $54,600 or thereabout. As this transpires, the average net worth of the top 1% of American households has grown with a whooping 2.4 times in the same duration, constituting an additional wealth of 80% poorest American households. The above paragraph explains why. That is how significant poverty levels are in the stock market trade opportunities.

Monopolies in Stock markets

Whenever market regulations are haphazard, ingenuine, impractical and largely uncontrolled with a bias towards a particular section of the business community, what transpires are monopolies. Particular individuals orchestrate and consciously coordinate all the supply to their advantage until the very objectives of typical public policy turns out to be the ruin instead of the benefiting benchmark of the public it sought to aid.  Diminishing access to opportunities, tremendous inequality in wealth and income, segregationist trends in the exploitation of resources are the core outcomes of perpetuated monopolies. Given the above arguments, it is easy to understand why the stock markets have turned out to be monopolies of a few wealthy individuals.

Mainstream economic analysis literature concur that market failures occur due to three core reasons (Medema, 2004). Let us discuss the two most important reasons relevant to this paper’s argument. To begin with, agents within a market segment gain unchecked market power that allows them to unfairly block all the other mutually qualifying parties from the beneficial gains of the trade in which they have an interest. (Remember the minimum stock capital requirements?)  The trend eventually yields imperfect com-petition scenarios such as monopolies, cartels and more importantly for this paper, monopolies (Fontanills and Gentile 36).

The second reason is that market operation policies may impose norms, requirements and price discrimination that makes opportunities to invest, only accessible to a select few. That means that market equilibrium is not attained simply because the market power restricts the investment entries from those possessing quantities that are below a certain level. That is what keeps prices and ultimately profits very high for those in the thick of things, since very few others can access the supply command they have (Medema).

Conclusively therefore, we can call the stock Exchange market a typical monopoly by virtue of segregation stock manipulation, delimiting trading requirements and unfair access to opportunities. It matters the agents you know. It matters how much capital you have to invest. It matters the levels of risk you can comfortably bear and still remain in business. It matters the insider information you have over various stock entities. It matters who thinks you are important. That is stock trading at its best; monopolistic.

Any doubts about the authenticity of the thesis statement now? Well there ought to be none. Look at this. In stock markets, more than one players own a particular property but the multiple players are always at the mercy of a president, the main player with the majority of stocks in that property. So, if one were to acquire the presidency of a block of publicly traded companies, he or she will have gained a monopoly proper.

Warren Buffet and company are as filthy rich as they are, consequent to that single reason; they command a monopoly (Schwager 116-153). The market features (traits) of a monopoly include high price levels, excessive entry barriers, supply constraints and concentrated points of market control. So, is the stock market a monopoly? The above examples and arguments are irrefutably in sync with that fact.

Effects of Inflation, Currency Crises and Macro-Economic Insecurity on Stock Trading

To drive home the argument projected by this paper let us examine how adverse external events and ‘shocks’ as they are known among stock traders, such as inflation, macro-economic insecurity and currency crises, can affect the stock exchange opportunities. The moment the fiscal balance of a nation is threatened, the moment there are insecurity issues and the currencies are in crises, the moment the economy suffers from inflation, the stock market portends great tragedies for the players. Yet again, and very unfortunate to an extent, the odds of making it out of the woods if that happens unfairly favors those who have control of the opportunity supplies and not every player in the stock trade (Bowles 73-81).

When the stock market is hit by such delimiting economic consequences, most governments move into de-leveraging measures to buoy the market but which instead manifests itself in rising bankruptcies, liquidity limitations and foreclosures (Gibson 29). Those who have minimal risk reduction abilities are most affected by the adverse eventualities. These include stock investors with marginal capital, stock investors whose only investment channel is in a singular property or company, those who cannot sell off their stocks in haste since they have to follow numerous delimiting bureaucracies and those that have no access to insider information such as which companies are most affected by the economic suppressant factors (Bowles 73-81).

Influential stock market traders will have all these advantages working for them such that, the market slump will affect them only marginally. As most small scale investors quit the market, the influential monopolies will return to business within a flash, sometimes aided by government leverage of billions of shillings in tax payer’s money (The recent US senates pay out to the tune of US $700 billion for instance). Gibson (2009) says that government rescues of the stock market only create dead elephant effect where only a few stock traders benefit and there is no residue effect to the larger market. According to Gibson (2009), government-stimulus programs and the Federal Reserve monetary policy of easy-money so not help amplify conditions in the stock market.

Significance of Environmental Degradation in Stock Trading

The globe is now at alert status on environmental degradation and the emergent adverse effects of global warming. Governments have thus moved in haste to constitute environmental regulators that could effectively harness the market forces into environmental consciousness. These regulators have in turn introduced structured programs that only release company-specific information on environmental performance.

Studies have affirmed a great relationship between economic stability and environmental degradation. So if a company is doing well despite environmental concerns, if the company is faring well in conservation efforts, it is bound to grow impressively. These are the companies that influential stock traders will monopolize and leave out those companies threatened and or threatening the environment. The stock market has made such great legends as Stan Drukenmiller and Bill Lipschutz, stock traders whose success is fascinating and awe-inspiring. As Schwager says (1995, 116), they belong to a circle of influential traders who know what string to pull, when and why in influence stock trading.

Small scale stock traders will be left with failing companies as their only available options and it is obvious that there will be no gains in such options. As effects of environmental degradation continue to bite, it is the small scale stock traders who will bear the blunt. Similar consequences are suffered when a nations security and defense is threatened. The stock market is severed by insecurity issues and in most cases, the small scale stock traders are the ones most susceptible to ruin.

Counter Arguments

Some schools of thoughts are adamant that the stock market has equal opportunities to every willing investor. Such schools of thought usually state that even those main industry players who now control the monopolies have had to compete in eth same conditions. Warren Buffet was not born into riches, but he found his way through the market and shrewdly created a fortune. To this argument, all it takes to succeed in this market is the determination, trading skill and forecasting art. You need to know where to place your money and why (Schwager. 116-153).

Another school of thought is more emphatic that the monopolistic, segregationist and market failure characteristics of the stock market are ideal in any capitalist environment. The proponents of this view believe that the same traits are identifiable in all other industries and not isolated in the stock market. Even if you were to invest in real estate, the amount of capital needed will still determine how much profits you make, they say.

Conclusion

Even when the above counter arguments are taken into consideration, the fact remains that the stock market has opportunities for many investors but these opportunities are only accessible to those who are within the segregationist bracket of wealth. A single warren Buffet can argue the case for the stock market equality in opportunities supply, with millions of Americans making cents out of their investments. A single success case or even a hundred of them cannot gainsay that millions of Americans, a typical case across the globe, are unduly limited in exploiting the opportunities in stock markets. Even in cases where an individual makes it through the system and accumulates wealth, that wealth is maintained and perpetuated by the same market failure traits that locks 99% others out of the opportunities.

Secondly, this paper is concerned with highlighting the market failure-like inequalities in stock market opportunities and not in the evaluation of whether such scenarios are ideal or not. Saying that such market conditions are not isolated to the stock market and that they are available across the board, only illustrates, confirms and consolidates the claim that the market failure-traits are present in the stock market parse.

And this brings our argument into a conclusive end. The stock market is lucrative and loaded with wealth generating opportunities. But the access to these opportunities is defined by market failure-like requirements, monopolistic handles and isolationist attitudes that lock out those who have minimal investment capitals and those who have limited access to insider secrets. That is essentially the reason why, 71% Americans are poor stock traders and only 1% belong to the warren Buffet elite echelon.

Works cited

Bowles, Samuel. Microeconomics: Behavior, Institutions, and Evolution. New York: Russel Sage Foundation. 2004: 73-81.

Gibson, Kate. “Past Suggests Further Rise for Stock Market”. MarketWatch. (2009). Retrieved on 12^th March 2010.  from < http://www.marketwatch.com/story/stock-markets-climb-not-too-steep-history-says-2009-11-11>

Medema, Steven. Mill, Sidgwick, and the Evolution of the Theory of Market Failure (Online Working Paper). 02 Apr. 2004. 02 March 2010.<http://www.un.org/esa/policy/wess/wess2010workshop/wess2010_wess2008extract.pdf >

Schwager, Jack. Market Wizards. New York. John Wiley & Sons. 1995: 116-153.