Investment Exchanges: Operation Safety Patrol

Provided By www.stocktradingonline.org

If you believe in the essential safety of the American economy, and if you have faith in the ability of American business to flourish in the future as it has in the past, investing your "rainy day" money as a means to increase those extra funds could be just the thing for you.

Is the market safe? This question, still asked and still wondered about, assumes that there is something inherently perilous about a stock exchange. There isn't. An exchange is simply an agency, a market where buyers and sellers can meet—through their brokers—to complete a transaction. An exchange—the market—is a complex and turbulent place, but it exists on the traffic of investors. When the pace is hot, the exchange boils. But when action is light, it languishes.

An exchange does not set prices. It does not issue stock. It does not, for itself, buy or sell a single share. It is a service, an accommodation, in a sense a kind of clearing house. It is an operating enterprise, an institution, but it does not dictate the action that takes place within its precincts, any more than Comiskey Park determines whether the White Sox win or lose.

To make the point about the limited though essential role it plays, this much can be said here. Since it does not issue stock, it can handle only those shares already in existence and listed. Of the outstanding shares in any particular company, only a small percentage is changing hands at any one time. The rest—the majority of it—is held by individuals and institutions who happen not to want to sell.

These transactions are conducted under regulations rigorously enforced by the exchange's board of governors and executive staff—and ultimately supervised by the Securities and Exchange Commission in Washington.

But what about 1929? For anyone who lived through the great market crash of this century, or has heard of it, this question is still likely to lurk in the subconscious.

Economists and historians by now generally agree that the collapse of the market and of securities values in 1929 was basically a reflection of underlying weaknesses in the economy. The fact was that stock values were not an accurate indicator of business conditions. The epic proportions of the disaster resulted from an unprecedented wave of optimistic speculation in stocks at a time when it was least warranted. When, for reasons still undiscovered by motivational researchers, the bubble finally burst, and Americans' buoyant faith that there was pie in the sky for all stockholders evaporated, the gap between reality and dreams was enormous. The downhill slide was long, steep, and agonizing.

Was the market innocent? In its role as agent, arranging purchases and sales on demand, it was. The automobile salesman cannot keep his customer from driving 90 miles per hour. On the other hand, it has long since become clear that exchange regulations in 1929 were far too loose. The practices that were permitted, if not encouraged, accentuated the feverish performance of the market and provided no means for braking the drop or for stimulating a recovery.

The best evidence that operations were far from ideal is the long and continuing effort that has since been made, particularly by the New York Stock Exchange, to tighten and improve the standards of doing business. Nothing less than high-caliber performance is now permitted by the Exchange and its members. And this has put heavy pressure on the less well-known and less highly organized regional exchanges to measure up. So in summation, yes, the stock market overall is a very safe place to invest your money.

This article is a small snippet from www.stocktradingonline.org

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